DRUG EMPORIUM INC, 10-K, 1997-05-23

DRUG EMPORIUM INC
10-K, 1997-05-23
DRUG STORES AND PROPRIETARY STORES

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<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 1, 1997

[ ] 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)

----------

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 16, 1997, there were 13,179,785 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 16, 1997 was approximately
$57,661,559 based on a closing price of $4.375 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 1, 1997. Part III, Items 10., 11., 12., and 13.
incorporate by reference portions of the Drug Emporium, Inc. Proxy Statement
for the 1997 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 1, 1997 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 138 company-owned stores, known as Drug
Emporium, F&M Super Drug Stores and "big D" stores. In addition to the
Company-owned stores, as of March 1, 1997, there are 88 franchise stores, and
three stores operating under a license agreement. The accompanying financial
statements include only amounts related to company-owned stores.

All the stores specialize in discount-priced merchandise,
including health and beauty aids, cosmetics and greeting cards. All stores with
the exception of the two "big D" stores operate full service pharmacies.

The Company's common stock trades on the Nasdaq National Market
under the symbol DEMP. As of March 1, 1997, there were 13,153,485 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.

STORE OPERATIONS

Company stores range in size from 19,000 to 38,000 square feet,
with a typical store having approximately 27,000 square feet, including retail
selling space and storage space in the rear of each store. Retail selling space
on average accounts for 75% of each store's total square feet.

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
director or regional vice president. The regional director or vice president's
responsibilities include visiting stores and assuring that Company standards
for buying, merchandising, customer service and store appearance are
maintained.

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 $250,000. 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 is 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 a week for a total of 80 hours a
week. In addition, the Company operates 24-hour stores in certain markets. Each
store has a similar layout, generally 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 229 Company, franchise and
licensed Drug Emporium stores by market as of March 1, 1997:

<TABLE>
<CAPTION>
WHOLLY-OWNED:
-------------
<S> <C>
Atlanta, Augusta, GA,..........................................................................20
Philadelphia, PA...............................................................................28
Los Angeles, San Francisco, and San Diego CA...................................................21
Columbus, Cincinnati, Dayton, OH...............................................................22
Detroit, MI....................................................................................17
Baltimore, MD and Washington, DC...............................................................10
Milwaukee, WI.................................................................................. 7
St. Louis, MO and Oklahoma City, OK............................................................ 5
Louisville, KY................................................................................. 4
Minneapolis, MN............................................................................... 4
---
138
===
</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
INDEPENDENT FRANCHISES:
-----------------------
<S> <C>
Seattle, Tacoma, WA............................................................................20
Dallas, Ft. Worth, TX..........................................................................15
Lafayette, Shreveport, LA, and Amarillo, Abilene,
Denton, Longview, Lubbock, Tyler and Waco TX,
Little Rock, AR, and Wichita KS...............................................................11
Phoenix, Tucson, AZ............................................................................ 9
San Antonio, Austin, Houston, TX.............................................................. 60
Charlotte, Raleigh, Durham, Concord, NC........................................................ 6
Virginia Beach, VA............................................................................. 4
Barboursville, Charleston, WV.................................................................. 4
Independence and Kansas City, MO and Overland Park KS.......................................... 3
Greensboro, Winston-Salem, NC.................................................................. 2
Union City, NJ................................................................................. 2
Victoria, Brownsville, TX...................................................................... 2
Nashville, TN.................................................................................. 2
Morris Plains, NJ.............................................................................. 1
Omaha, NE...................................................................................... 1
--
88
==
LICENSEES:
----------
Richmond, VA 3
==
</TABLE>

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 parking spaces. Extensive market
research may be 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.

FRANCHISE OPERATIONS

Drug Emporium continues to have a strong franchise-and-licensed-
store network consisting of 88 franchise and 3 licensed stores. Drug
Emporium maintains a Franchise Advisory Board designed to provide a forum
to investigate and discuss issues and concerns of the Company and its
franchisees.

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
generally 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 advises 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.

<PAGE> 4

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 1997, Drug Emporium franchisees opened a total of
five new stores and one store was opened under a license agreement. One
franchise changed ownership and four franchise stores closed during the year.

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 1997, 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, Louisville, Oklahoma City and
Baton Rouge. 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 66% of a typical store's sales mix is health and beauty
aids and general merchandise, 26% pharmacy items and 8% cosmetics.

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 is continuing to invest in and upgrade its
electronic in-store scanning and backdoor receiving systems.

During fiscal 1997, the Company's primary pharmacy supplier and
general merchandise distributor, McKesson Drug, accounted for over 30% 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 effectiveness 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.

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
that 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

<PAGE> 5

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 1, 1997, the Company had a total of approximately 6,500
employees, both full-time and part-time, of which 173 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 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 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 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. These regulatory functions contain civil
and criminal penalties for violations.

The sale of franchises by the Company is subject to regulation by
the Federal Trade Commission and various states in which it currently does
business or in which the Company may do business in the future. 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.

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 service
marks "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.

<PAGE> 6

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 51 Chairman of the Board, Chief Executive 1992
Officer, President and Director
Timothy S. McCord 38 Chief Financial Officer and Treasurer 1994
Jane H. Lagusch 51 Vice President, Secretary 1990
A. Joel Arnold 61 Senior Vice President 1995
</TABLE>

(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.

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.

TIMOTHY S. McCORD

Since June 1994, Mr. McCord, a Certified Public Accountant, has
served as Chief Financial Officer, and in June 1996 he was elected to the
office of Treasurer. 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 has been an officer of the Company since 1986. She
was appointed to her current position, Vice President and Secretary of the
Company, in 1993. Mrs. Lagusch has responsibility for corporate
administrative functions.

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.

<PAGE> 7

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,
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 owns a 20,000 square foot executive office building
and the surrounding land for use as its principal office in Powell, Ohio. The
Company also owns the building and land at one of its Detroit area store
locations.

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
claims a loss of investment capital, out-of-pocket expenses, loss of profits
and goodwill, fraud, interference with contract, and deceptive trade
practices. Plaintiff also seeks a declaration that the non-compete provision
in the franchise agreement is unenforceable. The Company is aggressively
defending this suit.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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 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

June 1, 1996 $4.313 $3.250
August 31, 1996 $4.563 $3.688
November 30, 1996 $4.625 $3.875
March 1, 1997 $5.750 $4.125
</TABLE>

The Company paid no dividends in fiscal 1997 or 1996.

The Company's bank credit agreement prohibits payment of
dividends, stock repurchases and acquisition of the Company's convertible
subordinated debt.

At April 28, 1997, 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 4,908.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this Item 6 is incorporated by
reference from page 12 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 1, 1997.

<PAGE> 8

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 13 and 14 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 1, 1997.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by
reference from pages 15 through 22 of the Drug Emporium, Inc. Annual Report
to Stockholders for the year ended March 1, 1997.

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."

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
25, 1997. The Company mailed its definitive proxy statement to
stockholders on or about May 19, 1997.

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 1, 1997.

<TABLE>
<CAPTION>
Page Nos. of
Annual Report
-------------
<S> <C>
Consolidated Balance Sheets as of March 1, 1997 and
March 2, 1996 15

Consolidated Statements of Operations for each of the
Three Fiscal Years in the Period Ended March 1, 1997 16

Consolidated Statements of Shareholders' Equity for each
of the Three Fiscal Years in the Period Ended March 1,
1997 16
</TABLE>

<PAGE> 9

<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for each of the
Three Fiscal Years in the Period Ended March 1, 1997 17

Notes to Consolidated Financial Statements 18-22

Report of Independent Auditors 23
</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)

(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 Term Loan Agreement dated
as of November 13, 1995, between Drug
Emporium, Inc. and Bank One, Columbus,
NA (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) **

<PAGE> 10

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) **

*10.14 Amendments No. 1, 2 and 3 to Third
Amended and Restated Revolving Credit
and Term Loan Agreement dated as of
November 13, 1995, (between Drug
Emporium, Inc. and Bank One, Columbus,
NA) and $5,000,000 Term Note dated
April 18, 1997 **

*10.15 Amendment to Employment Agreement made
the 11th day of March 1993 by and
between Drug Emporium, Inc. and David
L. Kriegel dated September 25, 1996,
and Employment Security Agreements
between Drug Emporium, Inc. and each
of A. Joel Arnold, Jane H. Lagusch and
Timothy S. McCord, dated September
25, 1996 **

*(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 1, 1997.
(limited to those portions
incorporated herein)

*(21) Subsidiaries of Registrant

21.1 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
Winter Fern Drug Distributors, Inc. Ohio
RJR Drug Distributors Inc. Delaware
Houston Venture, Inc. Ohio
Emporium Venture, Inc. Ohio
</TABLE>

*(23) Consent of Experts

23.1 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 1997.

<PAGE> 11

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 19, 1997 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 19, 1997

<TABLE>
<S> <C>
/s/ Timothy S. McCord /s/ David L. Kriegel
------------------------------------- ------------------------------------
Timothy S. McCord David L. Kriegel
Chief Financial Officer and Treasurer Chairman and Chief Executive Officer

/S/ Michael P. Leach /s/ Thomas D. Igoe
------------------------------------- ------------------------------------
Michael P. Leach Thomas D. Igoe
Controller 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
</TABLE>

<PAGE> 1
AMENDMENT NO. 1 TO THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT

THIS AMENDMENT NO. 1, dated as of February 23, 1996 (the "Amendment")
to the Third Amended and Restated Revolving Credit and Term Loan Agreement
dated as of November 13, 1995 (the "Agreement"), is between DRUG EMPORIUM,
INC., a Delaware corporation (the "Borrower"), and BANK ONE, COLUMBUS, NA
(the"Bank").

WHEREAS, the Borrower has determined that the leases for certain retail
stores which were assigned to Borrower or its affiliates from F&M Distributors,
Inc., as previously identified by Borrower, provide for below market rents (the
"Below Market Leases"); and

WHEREAS, the Borrower desires to characterize the Below Market Leases
as tangible, rather that intangible assets of the Borrower and its affiliates;
and

WHEREAS, the Borrower and the Bank have agreed to amend the Agreement
on the terms and conditions hereinafter set forth;

NOW THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the parties hereto, intending to be legally bound, hereby agree as
follows:

Section 1. AMENDMENT OF THE AGREEMENT. The definition of "Tangible Net
Worth" as set forth in Section 10.1 of the Agreement is hereby amended by the
addition of the following language at the end of the existing language:

Notwithstanding the provisions of the preceding clause (b),
"Tangible Net Worth" shall not be reduced by up to $3,957,000 of
assets made up of the Below Market Leases which amount shall be
treated, for purposes of this definition, as tangible assets
amortized over a period not to exceed ten years.

Section 2. REAFFIRMATION; NO DEFAULT. The Borrower hereby certifies
that as of the date hereof:

2.1. REAFFIRMATION. The representations and warranties of the Borrower
contained in the Agreement are correct and accurate as though made on and as
of the date hereof.

2.2. NO EVENTS OF TERMINATION. After giving effect to this Amendment,
no event has occurred and is continuing which constitutes an Event of Default
or would constitute an Event of Default but for the requirement that notice be
given or time elapse or both.

1
<PAGE> 2
Section 3. APPLICABLE LAW. This Amendment shall be deemed to be a
contract made under the laws of the State of Ohio and for all purposes shall be
construed in accordance with the laws of such state.

Section 4. COSTS AND EXPENSES. The Borrower hereby agrees to pay on
demand all costs and expenses in connection with the preparation, execution and
delivery of this Amendment and any other documents to be delivered in
connection herewith, including, without limitation, the reasonable fees and
out-of-pocket expenses of counsel to the Bank with respect thereto.

Section 5. COUNTERPARTS. This Amendment may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with the
Borrower and the Bank.

Section 6. CONFESSION OF JUDGMENT. Borrower hereby authorizes any
attorney at law to appear for Borrower, in an action on this Amendment or the
Agreement, at any time after the same becomes due, as herein provided, in any
court of record in or of the State of Ohio, or elsewhere, to waive the issuing
and service of process against Borrower and to confess judgment in favor of the
holder of the Agreement as hereby amended or the party entitled to the benefits
of the Agreement as so amended against Borrower for the amount that may be due,
with interest at the rate provided in the Agreement and costs of suit, and to
waive and release all errors in said proceedings and judgment, and all
petitions in error, and right of appeal from the judgment rendered.

Section 7. SUPPLEMENTAL AGREEMENT. The Amendment is hereby made
supplemental to and as part of the Agreement. All of the terms and provisions
of the Agreement, as amended above, shall remain in full force and effect from
and after the date first above written, as the same may be later amended,
supplemented or otherwise modified from time to time.

2
<PAGE> 3
The parties hereto have caused this Amendment to be duly executed by
their respective duly authorized officers as of the date first above written.

BANK ONE, COLUMBUS, NA

By:

Elizabeth E. Cadwallader, Vice President

DRUG EMPORIUM, INC.

By:

David L. Kriegel, Chief Executive Officer

WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.

3
<PAGE> 4

ACKNOWLEDGMENT AND CONSENT

Each of the undersigned (collectively, the "Guarantors" and individually, a
"Guarantor") hereby (a) acknowledges that it has reviewed the foregoing
Amendment No. 1 to Third Amended and Restated Revolving Credit and Term Loan
Agreement and consents to the terms and provisions thereof; (b) acknowledges
that consent of the undersigned is not necessary to make the Subsidiary
Guaranties given to the Bank by the Guarantors pursuant to the Agreement (the
"Guaranties") effective as to such Amendment No. 1; (c) acknowledges that the
granting of such consent by the Guarantors does not establish a pattern therefor
and, whether or not future consents are granted by the Guarantors to further
amendments, the obligations of the Guarantors under the Guaranties will not be
affected thereby; and (d) ratifies and affirms its respective Guaranty.

Dated as of the 23rd day of February, 1996.

CENTERLINE, INC. WINTER FERN DRUG DISTRIBUTIONS, INC.

By: By:

Its: Its:

RJR DRUG DISTRIBUTIONS INC. HOUSTON VENTURE, INC.

By: By:

Its: Its:

EMPORIUM VENTURE, INC. DRUG EMPORIUM OF MARYLAND, INC.

By: By:

Its: Its:

4
<PAGE> 5

DRUG EMPORIUM OF MICHIGAN, INC.

By:

Its:

5
<PAGE> 6

AMENDMENT NO. 2
TO
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
DATED AS OF NOVEMBER 13, 1995

THIS AMENDMENT NO. 2 ("Amendment") is dated as of May 24, 1996, between
DRUG EMPORIUM, INC. (the "Borrower") and BANK ONE, COLUMBUS, NA (the "Bank").

WITNESSETH:

THAT the Borrower and the Bank, parties to that certain Third Amended and
Restated Revolving Credit and Term Loan Agreement dated as of November 13, 1995,
as amended by Amendment No. 1 dated February 23, 1996 (the "Agreement"), have
agreed to amend the Agreement on the terms and conditions hereinafter set
forth. Terms not otherwise defined herein are used as defined in the Agreement
as amended hereby.

NOW, THEREFORE, the Borrower and the Bank hereby agree as follows:

SECTION 1. AMENDMENT OF THE AGREEMENT. The Agreement is, effective the date
hereof, hereby amended as follows:

SECTION 1.1. Section 1.1.1 shall be amended by deleting "February 28"
and inserting in place thereof "May 31".

SECTION 1.2. The first sentence in Section 1.1.2 shall be amended by
deleting "$45,000,000 thereafter'' and inserting in place thereof "$60,000,000
from May 24, 1996 until and including February 28, 1997 or (c) $55,000,000
thereafter."

SECTION 1.3. Section 4.2 shall be amended by adding the following to
the end thereof: "As an additional condition precedent to the obligation of the
Bank to provide or extend any Credit hereunder, Borrower shall furnish to the
Bank an aging report regarding the Accounts."

SECTION 1.4. The chart in Section 7.4 shall be deleted and replaced
with the following:

- 1 -
<PAGE> 7

PERIOD RATIO
- --------------------------------------------------------------------------
Date hereof until and including August 31, 1996 1.60:1.00
- --------------------------------------------------------------------------
September 1, 1996 until and including March 1, 1997 1.50:1.00
- --------------------------------------------------------------------------
March 2, 1997 until and including March 1, 1998 1.35:1.00
- --------------------------------------------------------------------------
March 2, 1998 and thereafter 1.25:1.00
- --------------------------------------------------------------------------

SECTION 1.5. Section 7.5 shall be amended by deleting "March 31" and
inserting in place thereof "August 31".

SECTION 1.6. The definition of "Borrowing Base" under Section 10.1 shall
be deleted and replaced with the following:

"Borrowing Base" means the Net Value of Eligible Accounts plus the Net
Value of eligible Inventory.

SECTION 1.7. The definition of "Borrowing Base Certificate" under Section
10.1 shall be deleted and replaced with the following:

"Borrowing Base Certificate" means a certificate, in the form required
by the Bank, signed by a duly authorized officer of the Borrower, that
computes the Borrowing Base, together with any memo of returns and
credits, remittance report, schedule of Accounts and such other
supporting documents and materials which the Bank, in its sole
discretion, may require to be delivered with such certificate, in the
form attached hereto.

SECTION 1.8. The definition of "Current Assets" under Section 10.1 shall
be deleted and replaced with the following:

"Current Assets" means all assets which may properly be classified as
current assets in accordance with generally accepted accounting
principles applied on a consistent basis plus 100% of any LIFO reserve
as of the date of determination, except that amounts due from
unconsolidated Subsidiaries and Affiliates shall be excluded.

- 2 -
<PAGE> 8

SECTION 1.9. The definition of "Current Liabilities" under Section 10.1
shall be deleted and replaced with the following:

"Current Liabilities" means all Liabilities as may properly be
classified as current Liabilities in accordance with generally accepted
accounting principles applied on a consistent basis, plus 40% of any
LIFO reserve as of the date of determination, and the principal amount
of all Revolving Credit Loans which are outstanding hereunder but shall
not include up to $3,000,000 in reserves reasonably established by the
Borrower in February 1996 in connection with the Disposition.

SECTION 1.10. The definition of "LIBO Rate Period" under Section 10.1
shall be amended by deleting the words "plus 60% of any LIFO reserve".

SECTION 1.11. The following new definitions shall be added in Section 10.1:

"Account" means and includes all accounts (whether or not earned by
performance), contract rights, chattel paper, instruments, documents,
general intangibles (including, without limitation, tax refunds and tax
refund claims) and all other forms of obligations owing to the Borrower,
whether secured or unsecured, whether now existing or hereafter created,
and whether or not specifically assigned to the Bank under the Loan
Documents, all guaranties and other security therefor, all merchandise
returned to or repossessed by the Borrower, and all rights of stoppage
in transit and all other rights and remedies of an unpaid vendor, lienor
or secured party.

"Customer" means any Person who is obligated as an account debtor or
other obligor on, under or in connection with any Account.

"Defaulted Account" means an Account that a Customer has not satisfied
in full on or before the 90th day after the date an invoice is issued.

"Eligible Account" means each Account of the Borrower which, at the time
of determination, meets all the following qualifications: (a) the
Borrower has lawful and absolute title to such Account, subject only to
the Lien of the Bank given by the Agreement; such Lien constitutes a
perfected Lien in the Account prior to the rights of any other Person
and such Account is not subject to any other Lien whatsoever; (b) the
Borrower has the full unqualified right to grant a Lien in such Account
to the Bank as security and collateral for the amounts owing hereunder

- 3 -
<PAGE> 9

and under the Notes; (c) the Account is evidenced by an invoice issued
to the proper Customer and is not evidenced by any instrument or chattel
paper; (d) the Account arose from the sale of goods by the Borrower in
the ordinary course of business, which goods have been shipped or
delivered to the Customer under such Account; and such sale was an
absolute sale and not on consignment, approval or a sale-and-return
basis; (e) no notice of the bankruptcy, receivership, reorganization,
insolvency, or financial embarrassment of the Customer has been received
by the Borrower; (f) the Account is a valid, legally enforceable
obligation of the Customer, and is not subject to any dispute, offset,
counterclaim, or other defense on the part of such Customer; (g) it is
not a Defaulted Account; (h) the terms of the Account require payment no
more than 90 days from the date an invoice is issued; (i) the Customer
on the Account is not (1) the United States of America or any foreign
government, or any department, agency or instrumentality thereof, (2)
the Borrower, or any Affiliate, or (3) located outside the United States
or Canada, unless the sale is secured by a letter of credit on which the
Bank is the sole beneficiary and the form, substance and issuer of which
are acceptable to the Bank; (j) the Borrower is not indebted to the
Customer on the Account (or any affiliate of such Customer) for any
goods provided or services rendered to the Borrower; (k) the Account is
not owing by any Customer with 25% or more of the value of its
outstanding Accounts not qualifying as Eligible Accounts; (l) the
Account is an Account representing all or part of the sales price of
merchandise, insurance and service within the meaning of Section 3(c)(5)
of the Investment Company Act of 1940, as amended; (m) a purchase of the
Account would constitute a "current transaction " within the meaning of
Section 3(a)(3) of the Securities Act of 1933, as amended; (n) the
Account is denominated and payable only in United States dollars in the
United States; and (o) the Bank, acting in its sole discretion, has not
notified the Borrower the Account may not be considered as an Eligible
Account.

"Net Value of Eligible Accounts" means 75% of the lower of the book
value or collectible value of Eligible Accounts, as reflected in the
Borrower's books in accordance with GAAP, net of all credits, discounts
and allowances (including all unissued credits in the form of a
competitive allowance or otherwise); provided, however, that the Net
Value of Eligible Accounts shall not exceed $7,500,000.

- 4 -
<PAGE> 10
"Net Value of Eligible Inventory" means (a) 40% of the value of the
Eligible Inventory from the date hereof until and including December
31, 1996 or (b) 35% of the value of the Eligible Inventory thereafter.

SECTION 1.12. Section 10.2 shall be amended and restated in its entirety
as follows:

10.2 Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in the preparation
of the financial statements of Borrower, provided however, that for
the purposes of calculating the financial covenants in Section 7.2.,
7.3., 7.4., 7.5. and 7.6., the LIBO Fixed Charge Coverage Ratio and
the LIBO Senior Leverage Ratio, the Borrower may exclude up to
$3,000,000 of a one-time non-cash charge incurred in fiscal 1997 as a
result of adopting SASB 121.

SECTION 2. CONDITIONS PRECEDENT TO EXTENSION OF CREDIT. Prior to the
extension of Credit hereunder, Borrower shall furnish to the Bank all of the
following, each dated the date hereof in form and substance satisfactory to the
Bank:

SECTION 2.1. Landlord Waivers. A Landlord's Waiver and Consent
substantially in the form attached hereto as Exhibit A from those of its
landlords in the jurisdictions where Eagleville Pharmacy, Inc.'s stores are
located and where such landlords are given a statutory Lien superior to or para
passu with the Lien granted to the Bank under the Loan Documents.

SECTION 2.2. Financing Statements. Copies of duly completed and executed
Uniform Commercial Code financing statements or statements of assignment or
statements of amendment with respect to the property covered by the Security
Agreement, in proper form for filing in all jurisdictions in which such filing
is necessary or appropriate to establish, perfect, protect and preserve the
rights, titles, interests, remedies, powers, privileges and Liens of the Bank in
the Accounts, Inventory and other personal property of Eagleville Pharmacy, Inc.
being acquired by the Borrower.

SECTION 2.3. Liens and Other Searches. Results of record searches by a
Person satisfactory to the Bank, of the Uniform Commercial Code filings which
may have been filed with respect to the personal property of Borrower in the
state and county filing offices and real estate records in each of the
jurisdictions requested by the Bank, and of judgment and tax Liens with respect
to Borrower.

SECTION 2.4. Consent of Guarantors. A properly executed Consent of
Guarantor of each of the guarantors under the Agreement.

- 5 -
<PAGE> 11

SECTION 2.5. Revolving Credit Note. A properly executed First Amendment to
Third Amended and Restated Revolving Credit Note, issued by the Borrower to the
Bank in the principal amount of $60,000,000 in the form attached hereto as
Exhibit B.

SECTION 2.6. Opinion of Counsel. The favorable opinion of Emens, Kegler,
Brown, Hill & Ritter, addressed to the Bank in the form attached to the
Agreement as Exhibit 4.7(k).

SECTION 2.7. Assignment of Indemnification Right. A properly executed
Assignment of Indemnification Right in the form attached hereto as Exhibit C.

SECTION 2.8. Estoppel Letters. An estoppel letter agreement executed by
each secured creditor acknowledging that it no longer has a Lien in the
inventory of Eagleville Pharmacy, Inc., substantially in the form attached
hereto as Exhibit D.

SECTION 3. GOVERNING LAWS. This Amendment No. 2 shall be governed by and
construed in accordance with the laws of the State of Ohio.

SECTION 4. COSTS AND EXPENSES. All costs and expenses of the Bank in
connection with the preparation, execution and delivery of this Amendment No. 2
and the other documents to be delivered in connection herewith, including,
without limitation, the reasonable fees and out-of-pocket expenses of outside
legal counsel incurred by the Bank or any Persons participating in the Loans
pursuant to Section 9 of the Agreement with respect thereto shall be paid by the
Borrower, on demand.

SECTION 5. COUNTERPARTS. This Amendment No. 2 may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be original and all of which when
taken together shall constitute one and the same agreement.

SECTION 6. CONFESSION OF JUDGMENT. The Borrower hereby authorizes any
attorney at law to appear for the Borrower, in an action on the Agreement, at
any time after the same becomes due, as herein provided, in any court of record
in or of the State of Ohio, or elsewhere, to waive the issuing and service of
process against the Borrower and to confess judgment in favor of the holder of
the Agreement or the party entitled to the benefits of the Agreement against the
Borrower for the amount that may be due, with interest at the rate herein
mentioned and costs of suit, and to waive and release all errors in said
proceedings and judgment, and all petitions in error, and right of appeal from
the judgment rendered.

SECTION 7. REAFFIRMATION OR REPRESENTATIONS AND WARRANTIES; NO DEFAULTS.
The Borrower hereby expressly acknowledges and confirms that the representations
and warranties of the Borrower set forth in Section 5 of the Agreement are true
and accurate on this date with the same.

- 6 -
<PAGE> 12
effect as if made on and as of this date; that no financial condition or
circumstance exists which would inevitably result in the occurrence of an Event
of Default under Section 8 of the Agreement; and that no event has occurred or
no condition exists which constitutes, or with the running of time or the
giving of notice would constitute an Event of Default under Section 8 of the
Agreement.

SECTION 8. REAFFIRMATION OF DOCUMENTS. Except as herein expressly
modified, the parties hereto ratify and confirm all of the terms, conditions
warranties and covenants of the Agreement, and all security agreements, pledge
agreements, mortgage deeds, assignments, subordination agreements, or other
instruments or documents executed in connection with the Agreement, including
provisions for the payment of the Notes pursuant to the terms of the
Agreement. This Amendment No. 2 does not constitute the extinguishment of any
obligation or indebtedness previously incurred, nor does it in any manner
affect or impair any security interest granted to the Bank, all of such
security interests to be continued in full force and effect until the
indebtedness described herein is fully satisfied.

- 7 -
<PAGE> 13

The Borrower and the Bank have executed this Amendment No. 2 as of the date
first above written.

BANK ONE, COLUMBUS, NA

By:

Name: Elizabeth E. Cadwallader

Its: Vice President

-8-
<PAGE> 14

DRUG EMPORIUM, INC.

By:

Name:

Its:

-9-
<PAGE> 15

EXHIBIT A

FORM OF LANDLORD'S WAIVER AND CONSENT

-10-
<PAGE> 16

EXHIBIT B

FIRST AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE

-11-
<PAGE> 17

EXHIBIT C

ASSIGNMENT OF INDEMNIFICATION RIGHT

-12-
<PAGE> 18

EXHIBIT D

ESTOPPEL LETTER

-13-
<PAGE> 19

AMENDMENT NO. 3
TO
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
DATED AS OF NOVEMBER 13, 1995

THIS AMENDMENT NO. 3 ("Amendment") is dated as of December 13, 1996,
between DRUG EMPORIUM, INC. (the "Borrower") and BANK ONE, COLUMBUS, NA (the
"Bank").

WITNESSETH:

THAT the Borrower and the Bank, parties to that certain Third Amended
and Restated Revolving Credit and Term Loan Agreement dated as of November 13,
1995, as amended by Amendment No. 1 dated February 23, 1996 and Amendment No. 2
dated May 24, 1996 (the "Agreement"), have agreed to amend the Agreement on the
terms and conditions hereinafter set forth. Terms not otherwise defined herein
are used as defined in the Agreement as amended hereby.

NOW, THEREFORE, the Borrower and the Bank hereby agree as follows:

SECTION 1. AMENDMENT OF THE AGREEMENT. The Agreement is, effective the
date hereof, hereby amended as follows:

SECTION 1.1. Section 1.1.1 shall be amended by deleting "May
31, 1999" and inserting in place thereof "May 31, 2000".

SECTION 1.2. Section 1.1.3(a) shall be amended by deleting
"180 after the date of issuance" and inserting in place thereof "180 days after
the date of issuance for documentary Letters of Credit or 365 days after the
date of issuance for standby Letters of Credit"; and by adding the following to
the end thereof "provided however, that the face amount of standby Letters of
Credit shall never exceed $2,000,000."

SECTION 1.3. Section 1.3.1 shall be amended by deleting "3/8
of 1%" and inserting in place thereof "1/4 of 1%".

SECTION 1.4. Section 1.3.2 shall be amended by adding the
following to the end of the first sentence thereof "provided however, that the
Borrower shall pay an issuance fee of two percent (2%) per annum of the face
amount of standby Letters of Credit."

<PAGE> 20

SECTION 1.5. Section 1.5.2 shall be deleted and replaced in
its entirety with the following:

1.5.2. Interest on Variable Rate Loans. Each Variable Rate Loan shall
bear interest on the unpaid principal balance of such Loan for each
day from the day such Loan is made until it becomes due, at a
fluctuating rate per annum equal to the rate set forth in Section 1.9.
Interest on all Variable Rate Loans shall be calculated on the basis
of the actual number of days elapsed over a year of 360 days. Any
change in the interest rate on a Variable Rate Loan due to a change in
the Prime Rate shall take effect, without notice to Borrower, at the
opening of business on the date of such change in the Prime Rate.
Interest on the Variable Rate Loans shall be payable quarterly on the
last day of each February, May, August and November commencing on the
first such date following the initial Variable Rate Loan.

SECTION 1.6. Section 1.5.3 shall be deleted and replaced in
its entirety with the following:

1.5.3. Interest on LIBO Rate Loans. Each LIBO Rate Loan shall bear
interest on the outstanding principal amount of such Loan for each day
from the day such Loan is made until it becomes due, at a rate per
annum equal to the rate set forth in Section 1.9. Borrower shall pay,
with respect to each LIBO Rate Loan, such additional amounts as shall
be determined pursuant to Section 1.6. Interest on each LIBO Rate Loan
shall be payable at the maturity of such Loan. Interest on all LIBO
Rate Loans shall be calculated on the actual number of days elapsed
over a year of 360 days.

SECTION 1.7. A new Section 1.9 shall be added that reads as
follows:

1.9. INTEREST RATES. The interest rate for Variable Rate Loans and
LIBO Rate Loans shall be based upon the Borrower's LIBO Fixed Charge
Coverage Ratio and LIBO Senior Leverage Ratio. If the Borrower
satisfies both conditions or the applicable section of the following
chart, then the Borrower may borrow at the corresponding rates:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------- -------------------------- ------------------------
APPLICABLE RATIO VARIABLE RATE LOANS LIBO RATE LOANS
- ------------------------------------------------------------------- -------------------------- ------------------------
<S> <C> <C>
LIBO Fixed Charge Coverage Ratio of 1.20:1.00 or greater, and a Prime Rate minus 50 LIBO Rate + 175
LIBO Senior Leverage Ratio of 1.05:1.0 or less basis points basis points
- ------------------------------------------------------------------- -------------------------- ------------------------
LIBO Fixed Charge Coverage Ratio of 1.10:1.00 or greater, and a Prime Rate LIBO Rate + 200
LIBO Senior Leverage Ratio of 1.20:1.0 or less basis points
- ------------------------------------------------------------------- -------------------------- ------------------------
LIBO Fixed Charge Coverage Ratio of 1.05:1.00 or greater, and a Prime Rate LIBO Rate + 225
LIBO Senior Leverage Ratio of 1.35:1.0 or less basis points
- ------------------------------------------------------------------- -------------------------- ------------------------
LIBO Fixed Charge Coverage Ratio of less than 1.05:1.00, or a Prime Rate Not Available
LIBO Senior Leverage Ratio of more than 1.35:1.0
- ------------------------------------------------------------------- -------------------------- ------------------------
</TABLE>

- 2 -

<PAGE> 21

SECTION 1.8. Section 2.2.2 shall be deleted and replaced in
its entirety with the following:

2.2.2. Unless Borrower has elected, from time to time, in accordance
with the provisions of Section 2.2.3 to cause all or a portion of the
Term Note to bear interest at a LIBO Rate, the Term Note shall bear
interest on the unpaid principal balance thereof calculated on the
basis of the actual number of days elapsed over a year of 360 days on
the unpaid principal balance thereof at a fluctuating rate per annum
equal to the rate for Variable Rate Loans set forth in Section 1.9.
Any change in the interest rate due to a change in the Prime Rate
shall take effect, without notice to Borrower, at the opening of
business on the date of the change in the Prime Rate.

SECTION 1.9. The chart in Section 7.2 shall be deleted and
replaced with the following:

<TABLE>
<CAPTION>
------------------------------------------------------------- ---------------------------
PERIOD TANGIBLE NET WORTH
------------------------------------------------------------- ---------------------------
<S> <C>
August 31, 1996 until and including February 28, 1998 $53,000,000
------------------------------------------------------------- ---------------------------
March 1, 1998 and thereafter $56,000,000
------------------------------------------------------------- ---------------------------
</TABLE>

SECTION 1.10. The chart in Section 7.3 shall be deleted and
replaced with the following:

<TABLE>
<CAPTION>
-------------------------------------------------------------------- --------------------
PERIOD RATIO
-------------------------------------------------------------------- --------------------
<S> <C>
From each October 1 until and including the following March 31 1.35:1.00
-------------------------------------------------------------------- --------------------
During the remainder of each year 1.50:1.00
-------------------------------------------------------------------- --------------------
</TABLE>

SECTION 1.11. The chart in Section 7.4 shall be deleted and
replaced with the following:

- 3 -

<PAGE> 22

SECTION 1.12. The chart in Section 7.6 shall be deleted and
replaced with the following:

SECTION 1.13. The definition of "Letter of Credit" under
Section 10.1 shall be amended by deleting the second sentence.

SECTION 1.14. The definition of "LIBO Rate" under Section
10.1 shall be deleted and replaced in its entirety with the following:

"LIBO Rate" means, as of the date of each LIBO Rate Loan, the rate of
interest (rounded upward, if necessary, to the next highest 1/16th of
1%) at which the Bank was offered deposits in United States dollars in
the London Interbank LIBO Market on the second London Banking Day
preceding the date of such LIBO Rate Loan for delivery on the date of
such LIBO Rate Loan, for deposits for a like period as such LIBO Rate
Loan and in an amount equal to the amount of such LIBO Rate Loan plus
the applicable basis point margin set forth in Section 1.9 and any
additional costs provided for in Section 1.5.4.

SECTION 1.15. The definition of "LIBO Rate Period" under
Section 10.1 shall be amended by (i) deleting "2.0:1.0" and inserting in place
thereof "1.35:1.0", and (ii) deleting "1.10:1.00" and inserting in place
thereof "1.05:1.0".

SECTION 2.1. Liens and Other Searches. Results of record
searches by a Person satisfactory to the Bank, of the Uniform Commercial Code
filings which may have been filed with respect to the personal property of
Borrower in the state and county filing offices and real estate records in each
of the jurisdictions requested by the Bank, and of judgment and tax Liens with
respect to Borrower.

SECTION 2.2. Consent of Guarantors. A properly executed
Consent of Guarantor of each of the guarantors under the Agreement.

SECTION 2.3. Revolving Credit Note. A properly executed
Second Amendment to Third Amended and Restated Revolving Credit Note, issued by
the Borrower to the Bank in the principal amount of $60,000,000 in the form
attached hereto as Exhibit A.

SECTION 2.4. Opinion of Counsel. The favorable opinion of
Borrower's counsel, addressed to the Bank in the form attached to the
Agreement as Exhibit 4.7(k).

- 4 -

<PAGE> 23

SECTION 3. GOVERNING LAW. This Amendment No. 3 shall be governed
by and construed in accordance with the laws of the State of Ohio.

SECTION 4. COSTS AND EXPENSES. All costs and expenses of the Bank in
connection with the preparation, execution and delivery of this Amendment No. 3
and the other documents to be delivered in connection herewith, including,
without limitation, the reasonable fees and out-of-pocket expenses of outside
legal counsel incurred by the Bank or any Persons participating in the Loans
pursuant to Section 9 of the Agreement with respect thereto shall be paid by
the Borrower, on demand.

SECTION 5. COUNTERPARTS. This Amendment No. 3 may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement.

SECTION 6. CONFESSION OF JUDGMENT. The Borrower hereby authorizes any
attorney at law to appear for the Borrower, in an action on the Agreement, at
any time after the same becomes due, as herein provided, in any court of record
in or of the State of Ohio, or elsewhere, to waive the issuing and service of
process against the Borrower and to confess judgment in favor of the holder of
the Agreement or the party entitled to the benefits of the Agreement against
the Borrower for the amount that may be due, with interest at the rate herein
mentioned and costs of suit, and to waive and release all errors in said
proceedings and judgment, and all petitions in error, and right of appeal from
the judgment rendered.

SECTION 7. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES; NO
DEFAULTS. The Borrower hereby expressly acknowledges and confirms that the
representations and warranties of the Borrower set forth in Section 5 of the
Agreement are true and accurate on this date with the same effect as if made on
and as of this date; that no financial condition or circumstance exists which
would inevitably result in the occurrence of an Event of Default under Section
8 of the Agreement; and that no event has occurred or no condition exists which
constitutes, or with the running of time or the giving of notice would
constitute an Event of Default under Section 8 of the Agreement.

SECTION 8. REAFFIRMATION OF DOCUMENTS. Except as herein expressly
modified, the parties hereto ratify and confirm all of the terms, conditions,
warranties and covenants of the Agreement, and all security agreements, pledge
agreements, mortgage deeds, assignments, subordination agreements, or other
instruments or documents executed in connection with the Agreement, including
provisions for the payment of the Notes pursuant to the terms of the Agreement.
This Amendment No. 3 does not constitute the extinguishment of any obligation
or indebtedness previously incurred, nor does it in any manner affect or impair
any security interest granted to the Bank, all of such security interests to be
continued in full force and effect until the indebtedness described herein is
fully satisfied.

- 5 -

<PAGE> 24

The Borrower and the Bank have executed this Amendment No. 3 as of the
date first above written.

BANK ONE, COLUMBUS, NA

By: /s/ ELIZABETH E. CADWALLADER
------------------------------------
Name: Elizabeth E. Cadwallader
Its: Vice President

DRUG EMPORIUM, INC.

By: /s/ DAVID L. KRIEGEL
------------------------------------
Name: David L. Kriegel,
Its: Chief Executive Officer

- 6 -

<PAGE> 25

EXHIBIT A

SECOND AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE

- 7 -
<PAGE> 26

TERM NOTE

$5,000,000 Powell, Ohio
April 18, 1997

On or before May 30, 1997, (the "Maturity Date") for value received,
the undersigned, DRUG EMPORIUM, INC., a Delaware corporation (the "Company"),
hereby promises to pay to the order of BANK ONE, COLUMBUS, NA (the "Lender") or
its assigns, as further provided in this promissory note ("Note"), the
principal amount of Five Million Dollars ($5,000,000), together with interest
on the unpaid principal balance from time to time outstanding hereunder until
paid in full, at the rates determined and payable at the times as herein
specified. Both principal and interest are payable in federal funds or other
immediately available money of the United States of America at the Main Office
of the Lender, Bank One, Columbus, NA, 100 East Broad Street, Columbus, Ohio.

Section 1. Defined Terms. Term not defined herein have the meanings
given to them in the Third Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of November 13, 1995, between the Company and the Lender,
as amended by Amendment No. 1 dated May 24, 1996, Amendment No. 2 dated May 24,
1996 and Amendment No. 3 dated December 13, 1996, and as the same may be
amended, modified or supplemented from time to time (the "Agreement").

Section 2. Payments. The principal amount of this Note and all
accrued interest thereon are due and payable on the Maturity Date.

2.1. Interest. Interest on the outstanding principal amount,
for each day from the date hereof until this Note is paid in full, shall be at
a rate per annum equal to the rate of interest for such day publicly announced
from time to time by the Lender as its prime rate. All interest under this Note
shall be computed on the basis of the actual days elapsed in a year of 360
days.

Section 3. Prepayment. The principal of this Note may be prepaid
in whole at any time or in part from time to time.

Section 4. Security. This note is secured by and entitled to the
benefits of (a) the Security Agreement, (b) the Pledge Agreement, (c) the
Subsidiary Guaranties and (d) the Subsidiary Security Agreements, each as
amended from time to time (collectively, the "Security Documents").

Section 5. Default.

5.1. Events of Default. There shall exist an "Event of
Default" if any of the following occurs:

5.1.1. The Company fails to make a payment of interest or principal on
the Note when and as due.

<PAGE> 27

5.1.2. An "Event of Default" (as defined in Section 8 of the Agreement)
occurs under the Agreement.

5.2. Acceleration. At any time after an Event of Default, the
Lender shall have the right to make a demand for payment upon the Company,
whereupon the principal amount of this Note, all accrued interest thereon, all
fees, costs and all such other amounts owing hereunder and under the Security
Documents shall become forthwith due and payable, without presentment, demand,
protest or other notice of any kind, all of which is hereby expressly waived by
the Company, notwithstanding anything contained in the Security Documents to
the contrary. In respect of the Collateral (as defined in the Security
Documents) or any part thereof, the Lender shall have such rights and remedies
as are provided by the UCC and such other rights and remedies in respect
thereof which the Lender may have at law or in equity or under the Security
Documents, including without limitation the right to enter any premises where
any of the Collateral is located and take possession of the same without demand
or notice and without prior judicial hearing or legal proceedings, which the
Company hereby expressly waives, and to sell all or any portion of the
Collateral at public or private sale after 10 days' notice, which the Company
hereby agrees is reasonable notice for such sale, at such place or places and
at such time or times and in such manner and upon such terms, whether for cash
or on credit, as the Lender in its sole discretion may determine, as well as
such other rights and remedies as are provided in the Security Documents. Upon
any such sale of any of the Collateral, the Lender may purchase all or any of
the Collateral being sold, free from any equity or right of redemption. The
Lender shall apply the proceeds of any such sale and any proceeds received by
the Lender from the collection of accounts and proceeds to the Obligations (as
defined in the Security Documents). If such proceeds are insufficient to pay
the amounts required by law, the Company shall be liable for any deficiency in
the amount so realized from its Collateral. The rights and remedies of the
Lender expressly specified in the Agreement are cumulative and not exclusive of
any other rights and remedies which the Lender would otherwise have. If the
Lender commences a proceeding to take possession of the Collateral under this
Note or the Security Documents, the Company waives the requirement, if any,
that the Lender post a bond or any other type of security.

Section 6. Setoffs. Upon the occurrence of any Event of Default, the
holder hereof shall have the right to setoff against all obligations of the
Company hereunder or under any of the Security Documents, whether matured or
unmatured, all amounts owing to the Company or any wholly-owned subsidiary of
the Company by the holder hereof or any affiliate of the holder hereof, whether
or not then due and payable, and all other funds or property of the Company or
any wholly-owned subsidiary of the Company on deposit with or otherwise held by
or in the custody of the holder hereof or any affiliate of the holder hereof
for the beneficial account of the Company or any wholly-owned subsidiary of the
Company.

Section 7. Miscellaneous.

7.1. Successors and Assigns. Whenever in this Note either of the
parties is referred to, such reference shall include the successors and assigns
of such party; and all terms and provisions

<PAGE> 28

of this Note shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.

7.2. Notices. Notices, demands and communications shall be deemed to
have been properly given to Company when faxed to (614) 548-6541 or deposited
in the United States mail, registered or certified, postage prepaid, and
addressed to Company at 155 Hidden Ravines Drive, Powell, Ohio 43065,
Attention: Chief Executive Officer, or hand delivered to the same address. Any
communication to the Lender shall be deemed properly given if faxed, hand
delivered or similarly mailed as follows:

Bank One, Columbus, NA
Commercial Loan Department 100 East
Broad Street Columbus, Ohio 43271-0170
Fax: (614) 248-5518

7.3. No Implied Waivers. No delay on the part of the Lender in
exercising any right, power or privilege granted hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude any other or further exercise thereof. The rights
and remedies herein expressly specified are cumulative and not exclusive of any
other rights and remedies which the Lender would otherwise have.

7.4. Amendments, Modifications, Etc. No amendment, modification,
termination, or waiver of any provision of this Note nor consent to any
departure by Company therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Lender, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No notice or demand on Company in any case shall entitle
Company to any other or further notice or demand in similar or other
circumstances.

7.5. Applicable Law. This Note shall be deemed to be contracts
made under the laws of the State of Ohio, and for all purposes shall be
construed in accordance with the laws of such state.

7.6. Severability. Any provision of this Note which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.

7.7. Expenses. All fees, costs or expenses, including reasonable
fees and expenses of outside legal counsel incurred by the Lender in
connection with the preparation, administration, amendment, modification
or enforcement of the Note shall be paid by Company on demand.

7.8. Counterparts. This Note may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with Company
and the Lender.

<PAGE> 29

7.9. Entire Agreement. The Note and Security Documents set forth the
entire understanding between the parties concerning the subject matter thereof
and incorporate all prior negotiations and understandings. There are no
covenants, promises, agreements, conditions or understandings, either oral or
written, between them relating to the subject matter of this Note other than
those set forth in the Note and Security Documents. No representation or
warranty has been made by or on behalf of any party to the Note and Security
Documents (or any officer, director, employee or agent thereof) to induce the
other parties to enter into the Note and Security Documents or to abide by or
consummate any transactions contemplated by any term of the Note, except
representations and warranties, if any, expressly set forth or referred to in
the Note and Security Documents.

7.10. Headings. Headings of the sections of this Note are for
convenience only and shall not affect the construction of this Note.

7.11. Effective Date. This Note shall become effective upon the
execution of a counterpart hereof by each of the parties.

7.12. Confession of Judgment. Company hereby authorizes any attorney
at law to appear for Company, in an action on the Note, at any time after the
same becomes due, as herein provided, in any court of record in or of the State
of Ohio, or elsewhere, to waive the issuing and service of process against
Company and to confess judgment in favor of the holder of the Note or the party
entitled to the benefits of the Note against Company for the amount that may be
due, with interest at the rate herein mentioned and costs of suit, and to waive
and release all errors in said proceedings and judgment, and all petitions in
error, and right of appeal from the judgment rendered.

7.13. Time. Unless otherwise stated, all time references set forth
herein are stated in Columbus, Ohio time.

7.14. Consent to Jurisdiction; Service. As a specifically bargained
inducement for the transactions set forth herein, the parties hereto
specifically agree that any action, suit or proceeding in respect of or arising
from or out of this Note, its validity or performance, shall be initiated and
prosecuted as to all parties and their successors and assigns at Columbus, Ohio
except to the extent that such exclusive jurisdiction would be inconsistent
with the Lender's exercise of its rights under Section 7.12 hereof. The parties
hereto consent to and submit to the exercise of jurisdiction over their person
by any court situated at Columbus, Ohio, including without limitation the
United States District Court for the Southern District of Ohio and having
jurisdiction over the subject matter hereof and the Company hereby irrevocably
appoints and designates CT Corporation System its current agent for service of
process in the State of Ohio (the "Agent") as its true and lawful attorney in
fact and duly authorized agent for service of legal process and agrees that
service of such process upon such attorney in fact shall constitute personal
service of such process upon such party. Company hereby agrees to maintain the
Agent as its statutory agent for service of process in the State of Ohio during
the term of this Note.

<PAGE> 30

7.15. Waiver of Jury Trial. THE LENDER AND THE COMPANY HEREBY
VOLUNTARILY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE, BETWEEN THE LENDER AND THE COMPANY ARISING OUT OF, IN CONNECTION
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THE
COMPANY AND THE LENDER IN CONNECTION WITH THIS NOTE, OR ANY OTHER NOTE OR
DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS
RELATED HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE LENDER TO ENTER
INTO THE FINANCING TRANSACTIONS WITH THE COMPANY. IT SHALL NOT IN ANY WAY
AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE LENDER'S ABILITY TO PURSUE ITS
REMEDIES INCLUDING, BUT NOT LIMITED TO, ANY CONFESSION OF JUDGMENT OR COGNOVIT
PROVISION CONTAINED IN THIS NOTE OR ANY OTHER DOCUMENT RELATED HERETO.

DRUG EMPORIUM, INC.

By: /s/ TIMOTHY S. MCCORD
--------------------------------------------
Timothy S. McCord, Chief Financial Officer

<PAGE> 1
Exhibit 10.15

AMENDMENT TO EMPLOYMENT AGREEMENT

THIS AMENDMENT amends the Employment Agreement made the 11th day of
March, 1993 by and between DRUG EMPORIUM, INC., a Delaware Corporation having
its principal executive offices at 155 Hidden Ravines Drive, Powell, Ohio 43065
(the "Company"), and DAVID L. KRIEGEL, an individual residing at 8626 Scotscraig
Court, Dublin, Ohio 43017 ("Kriegel"), and is entered into this ____ day of
_________________, 1996.

WHEREAS Kriegel is employed as Chairman and Chief Executive Officer of
Company, and has served in that capacity since December 1, 1992; and

WHEREAS the Company is approached from time to time by outside
individuals and others who have an interest in acquiring all or a portion of
the Company's stock, some of whom have a background indicating the capability
of operating the Company, and some of whom do not; and

WHEREAS the Company desires to evaluate such individuals, companies
and potential offers in the best interests of its shareholders, without the
distraction of the effect of a change in control on its Chief Executive
Officer; and

WHEREAS the Company also wants to assure managerial continuity and
stability during any takeover attempt.

NOW, THEREFORE, in consideration of the foregoing and of the
agreements and covenants herein contained, Company and Kriegel agree that the
Employment Agreement between them dated March 11, 1993, be amended as follows:

1. The Company agrees that if:

a. There is a change in control of the Company as
defined herein; and

b. Kriegel leaves the employment of the Company for any
reason, other than discharge for cause as defined in
the Employment Agreement between Kriegel and
Company, within one year after such change in
control; then

(1) Kriegel shall receive, in a lump sum, a
cash payment in the amount of the total of
the salary and bonus received by Kriegel
from the Company in the last three full
fiscal years prior to the date of the
change in control;

(2) Kriegel shall continue to receive all
employment benefits, including medical
benefits, health insurance and other, to
which he may be entitled as a member of
senior management of the Company for a
period of 36 months after the date of such
change of control;

<PAGE> 2

(3) Kriegel shall receive an additional
retirement benefit, over and above that to
which he would normally be entitled under
the Company's retirement plans, equal to
the actuarial equivalent of the additional
amount Kriegel would have earned under such
retirement plans or programs had he
accumulated three additional continuous
years of service. Such amount shall be paid
to Kriegel in a cash lump sum payment at
his normal retirement age, or, at Kriegel's
option, at his early retirement age as
provided for in such retirement plan.

Notwithstanding the provisions of subparagraphs (1),
(2) and (3) above, the aggregate present value of the
payments in the nature of compensation Kriegel shall
receive hereunder shall not exceed an amount
determined by multiplying three (3) times the
aggregate present value of Kriegel's base amount
calculated in accordance with Internal Revenue Code
Section 280G by ninety-nine percent (99%).

2. The amounts paid to Kriegel hereunder shall be considered severance
pay in consideration of the past services he has rendered to the Company and in
consideration of his continued service from the date hereof to his entitlement
to those payments. Kriegel shall have no duty to mitigate his damages by
seeking other employment. Should Kriegel actually receive payments from any
other employment, the payments called for hereunder shall not be reduced or
offset by any such payments.

3. As used herein, the term "change in control" shall mean
either:

a. The ownership (whether direct or indirect) of shares
in excess of 50% of the outstanding shares of common
stock of the Company by a person or group of persons
not directors of the Company as of the date of this
agreement; or

b. The occurrence of both of the following:

(1) The ownership (whether direct or indirect)
of shares in excess of 20% of the
outstanding shares of common stock of the
Company by a person or group of persons not
directors of the Company as of the date of
this Agreement; and

(2) Any change in the composition of the Board
of Directors of the Company resulting in a
majority of the directors of the Company as
of the date of this Agreement no longer
constituting a majority; provided, however,
that in making such determination,
directors who were elected by, and on the
recommendation of, such present majority
shall be treated as present directors.

4. The arrangements called for by this Amendment are not
intended to have any effect on Kriegel's participation in any other benefits
available to executive personnel or to

<PAGE> 3

preclude other compensation or additional benefits as may be authorized by the
Company or its board from time to time.

5. This Amendment shall be binding and shall inure to the
benefit of the respective successors, assigns, legal representatives and heirs
to the parties hereto.

6. This Amendment shall terminate if, prior to any change in control
as defined herein, Kriegel shall voluntarily resign, retire, become permanently
and totally disabled, or voluntarily take another position requiring a
substantial portion of his time. This Amendment shall also terminate if
Kriegel's employment as Chairman and Chief Executive Officer of the Company
shall have been terminated for any reason by the board of directors of the
Company for any reason prior to a change in control as defined herein.

DRUG EMPORIUM, INC.

By:
--------------------------- ---------------------------
David L. Kriegel

Its:
---------------------------

<PAGE> 4

EMPLOYMENT SECURITY AGREEMENT

This Employment Security Agreement is made as of the _____ day of
__________________________, 1996, by and between DRUG EMPORIUM, INC., a
Delaware Corporation having its principal executive offices at 155 Hidden
Ravines Drive, Powell, Ohio 43065 (the "Company"), and _________________, an
individual employed by the Company (the "Executive").

WHEREAS, Executive is employed by the Company in a key executive
capacity and possesses intimate knowledge of the business and affairs of the
Company and is a valuable asset to the operations of the Company; and

WHEREAS, the Company is approached from time to time by outside
individuals and others who have an interest in acquiring all or a portion of
the Company's stock, some of whom have a background indicating the capability
of operating the Company, and some of whom do not; and

WHEREAS, the Company desires to evaluate such individuals, companies
and potential offers in the best interests of its shareholders, without the
distraction of the effect of change in control on Executives; and

WHEREAS, the Company also wants to assure managerial continuity and
stability during any takeover attempt.

NOW, THEREFORE, in consideration of the foregoing, and of the
agreements and covenants herein contained, Company and Executive agree as
follows:

1. This Agreement shall be effective and binding immediately upon its
execution, but it shall not become operative unless and until a "change in
control" of the Company, as defined hereinbelow, shall occur. The date of such
change in control is referred to herein as the "operative date" of this
Agreement.

2. As used herein, the term "change in control" shall mean either:

b. The occurrence of both of the following:

<PAGE> 5

3. The term of this Agreement shall commence with the operative date
and shall continue for a term of two calendar years thereafter. During the term
of this Agreement, the Company agrees to continue the Executive in the employ
of the Company, and the Executive agrees to remain in the employ of the
Company, in the Executive's then-present capacity with no diminution of
responsibility, and to exercise such authority and perform such duties as are
commensurate with the authority exercised and duties performed by the Executive
during the six months immediately prior to the operative date of this
Agreement. Such services shall be performed in the same metropolitan area where
the Executive was employed immediately prior to the operative date, or at such
other location as the Company may reasonably require or to which Company and
Executive may agree.

4. During the term of this Agreement, Executive shall be compensated
at a base salary, bonus, stock option and employee benefit level commensurate
with the salary, bonus, stock option and benefits to which the Executive was
entitled in the twelve months prior to the operative date, or such greater
amount provided by the Company for Executives of comparable duties.

5. The employment of Executive under this Agreement may be terminated,
and the Executive not be entitled to the benefits set forth herein, only upon
the occurrence of one or more of the following events:

a. Death of the Executive; or

b. The Executive becoming permanently disabled within
the meaning of, and the receipt of disability
payments pursuant to, the long-term disability plan
in effect for management employees of the Company
immediately prior to the operative date; or

c. Termination by the Company for cause, as defined
below; or

d. Voluntary resignation by the Executive as defined
below.

6. As used herein, the term "cause" shall mean the Executive (1)
failed in a material and substantial way to perform his duties hereunder, (2)
materially breached any of his other obligations set forth herein, or (3)
committed a material act of malfeasance, disloyalty, dishonesty or breach of
trust against the Company. The termination or discharge of the

<PAGE> 6

Executive for any reason other than those specified as constituting cause shall
be a termination without cause and a breach of this Agreement.

No termination for cause under the preceding paragraph shall be deemed
to have occurred without prior service of a written notice of termination to
the Executive specifying the factual basis for the allegation of cause, and the
failure of the Executive to cure such basis within 30 days after the notice.

7. The Executive's resignation shall not be "voluntary" and shall not
be a reason for termination of the Agreement in the event that:

a. Without the express written consent of the
Executive, the Executive reasonably determines that
he is assigned any duties inconsistent with his
position, duties, responsibility and status with the
Company at the operative date, or his authority,
position or title in effect immediately prior to the
operative date is materially changed;

b. The compensation, benefits or perquisites of the
Executive in effect at the operative date of this
Agreement are materially reduced;

c. The Company fails to continue in effect any benefit
or compensation plan providing the Executive with
substantially similar benefits to those which the
Executive enjoyed as of the operative date; or

d. In the event that unreasonable relocation or
excessive travel demands in comparison to those in
effect as of the operative date are made upon the
Executive.

8. In the event of a breach of this Agreement by the Company or the
termination of the Executive's employment during the term of this Agreement
other than for cause as defined above, then:

a. Executive shall receive, in a lump sum, a cash
payment in the amount of the total of the salary and
bonus received by Executive from the Company in the
last two full fiscal years prior to the operative
date;

b. Executive shall continue to receive all employment
benefits, including medical benefits, health
insurance and other, to which he may be entitled as
a member of senior management of the Company for a
period of 24 months after the operative date; and

c. Executive shall receive an additional benefit, over
and above that to which he would normally be
entitled under the Company's retirement plans, equal
to the actuarial equivalent of the additional amount
Executive would

<PAGE> 7

have earned under such retirement plans or programs
had he accumulated two additional continuous years
of service. Such amount shall be paid to Executive
in a cash lump sum payment as his normal retirement
age, or, at Executive's option, at his early
retirement age as provided for in such retirement
net plan.

Notwithstanding the provisions of subparagraphs a., b. and c. above, the
aggregate present value of the payments in the nature of compensation Executive
shall receive hereunder shall not exceed an amount determined by multiplying
three (3) times the aggregate present value of Executive's base amount
calculated in accordance with Internal Revenue Code Section 280G by ninety-nine
percent (99%).

9. The amounts paid to Executive hereunder shall be considered
severance pay in consideration of the past services Executive has rendered to
the Company, and in consideration of continued service from the date hereof to
Executive's entitlement to those payments. Executive shall have no duty to
mitigate damages by seeking other employment. Should Executive actually receive
payments from any other employment, the payments called for hereunder shall not
be reduced or offset by any such payments.

10. In the event Executive's employment is terminated after the
operative date:

a. For twenty-four (24) months after the termination of
Executive's employment hereunder, Executive shall
not, unless acting with the prior written consent of
Company:

(1) Directly or indirectly, for himself, or on
behalf of or in conjunction with any
entity, solicit or endeavor to recruit or
hire, as an employee, consultant, agent or
representative, any person who was an
employee of the Company within six months
of the date that the Executive first
solicited or endeavored to recruit or hire
such person.

(2) Discourage or otherwise attempt to prevent
any person from doing business with the
Company.

b. In the event that the provisions of this Section
should ever be deemed to exceed the time limitations
permitted by applicable law, then such provisions
shall be deemed reformed to the maximum time
limitations permitted by applicable law.

c. Executive specifically acknowledges and agrees that
the remedy at law for any breach of the provision of
this section will be inadequate and that the
Company, in addition to any other relief available
to it, shall be entitled to temporary and permanent
injunctive relief without the necessity of

<PAGE> 8

providing actual damage. The provision of this
Section 10 shall remain applicable to Executive
until a final decision of a court of competent
jurisdiction is entered finding that Executive was
discharged by the Company in violation of Section 5
hereof.

11. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent the Company would be required to perform if no such succession had taken
place. This Agreement shall be binding upon and inure to the benefit of the
Company and any successor to the Company, including without limitation any
persons acquiring directly or indirectly all or substantially all of the
business and/or assets of the Company whether by purchase, merger,
consolidation, reorganization or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this Agreement), but shall not
otherwise be assignable, transferable or delegable by the Company. The failure
of the Company to obtain such an assignment shall be a breach of this
Agreement, in which event the date of succession or transfer shall be deemed to
be the date of the breach.

12. This Agreement and all rights of the Executive shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, estates, executors, administrators, heirs and beneficiaries.
All amounts payable to the Executive shall be paid, in the event of the
Executive's death, to the Executive's estate, heirs and representatives. This
Agreement shall inure to the benefit of, be binding upon and be enforceable by,
any successor, surviving or resulting corporation or other entity to which all
or substantially all of the Company's business and assets shall be transferred.
This Agreement shall not be terminated by the voluntary or involuntary
dissolution of the Company.

13. Executive's right to receive payments hereunder shall not be
assignable, transferable or delegable, whether by pledge, creation of a
security interest or otherwise, other than by a transfer by his will or by the
laws of descent and distribution and, in the event of any attempted assignment
or transfer contrary to this Section, the Company shall have no liability to
pay any amount so attempted to be assigned, transferred or delegated.

14. This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of Ohio,
without giving effect to the principles of conflict of laws of such State. Any
dispute arising out of this Agreement shall be determined by arbitration in
Columbus, Ohio under the rules of the American Arbitration Association then in
effect and judgment upon any award pursuant to such arbitration may be enforced
in any court having jurisdiction thereof.

15. Miscellaneous

<PAGE> 9

a. Enforcement: The provisions of this Agreement shall
be regarded as divisible, and if any of said
provisions or any part hereof are declared invalid
or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the
remainder of such provisions or parts hereof and the
applicability thereof shall not be affected thereby.

b. Withholding: The Company shall be entitled to
withhold from amounts to be paid to the Executive
hereunder any federal, state or local withholding or
other taxes or charges which it is from time to time
required to withhold. The Company shall be entitled
to rely on an opinion of counsel if any question as
to the amount or requirement of any such withholding
shall arise.

c. Expenses and Interest: If, after a change in
control of the Company any claim or legal or
arbitration proceeding shall be made or brought to
recover damages for breach hereof, the Executive
shall recover from the Company prejudgment interest
on any money judgment or arbitration award obtained
by the Executive, calculated at the rate of interest
announced by Bank One Columbus, Ohio from time to
time at its prime rate, calculated from the date
that payments to him should have been made under
this Agreement.

d. Payment Obligations Absolute: The Company's
obligation during and after the term of this
Agreement to pay the Executive the compensation and
to make the arrangements provided herein shall be
absolute and unconditional and shall not be affected
by any circumstances, including, without limitation,
any setoff, counterclaim, recoupment, defense or
other right which the Company may have against him
or anyone else. All amounts payable by the Company
hereunder shall be paid without notice or demand.
Each and every payment made hereunder by the Company
shall be final and the Company will not seek to
recover all or any part of such payment from the
Executive or from whosoever may be entitled thereto,
for any reason whatsoever.

e. Waiver and Entire Agreement: No provisions of this
Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and the
Company. No waiver by either party hereto at any
time of any breach by the other party hereto or
compliance with any condition or provision of this
Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior
or subsequent time. NO agreements or
representations, oral or otherwise, expressed or
implied with respect to the subject matter hereof

<PAGE> 10

have been made by either party which are not set
forth expressly in this Agreement.

f. Notices: For all purposes of this Agreement, all
communications including without limitation notices,
consents, requests or approvals, provided for herein
shall be in writing and shall be deemed to have been
duly given when delivered or five business days
after having bene mailed by United States registered
or certified mail, return receipt requested, postage
prepaid, addressed to the Company (to the attention
of the Secretary of the Company) at its principal
executive office and to the Executive at his
principal residence, or to such other address as any
party may have furnished to the other in writing and
in accordance herewith, except that notices of
change of address shall be effective only upon
receipt.

g. Severability: The invalidity or unenforceability of
any particular provision of this Agreement shall not
affect the other provisions hereof, and this
Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were
omitted.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first written above.

DRUG EMPORIUM, INC.

By:
----------------------------------

Its:
---------------------------------

EXECUTIVE:
---------------------------

<PAGE> 1

EXHIBIT 23.1

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 4, 1997, 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 1, 1997.

ERNST & YOUNG LLP

Columbus, Ohio
May 19, 1997

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