<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
November 30, 1996 OR
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
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Commission File Number 0-16998
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DRUG EMPORIUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1064888
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Hidden Ravines Drive, Powell, Ohio 43065
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 548-7080
------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at 11/30/96
- ---------------------------- ----------------
Common Stock, $.10 par value 13,153,485 shares
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<PAGE> 2
INDEX
DRUG EMPORIUM, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets........................................................................3
Consolidated Statements of Operations..............................................................4
Consolidated Statements of Cash Flows .............................................................5
Notes to Consolidated Financial Statements.........................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................7-8
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K...............................................................9
SIGNATURES.................................................................................................10
- ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- ---------------------------------------------------
PER SHARE.........................................................................................11
---------
</TABLE>
2
<PAGE> 3
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, March 2,
------------ --------
1996 1996
---- ----
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 876 $ 767
Accounts receivable............................................... 16,449 13,018
Inventories, net of LIFO reserves of $23.7
million and $21.2 million at November 30,
1996 and March 2, 1996, respectively........................... 182,822 188,498
Income taxes and other............................................ 2,787 5,874
-------- --------
Total current assets........................................ 202,934 208,157
Property and equipment, net.......................................... 31,394 28,793
Goodwill............................................................. 4,863 5,311
Other assets......................................................... 1,723 1,637
-------- --------
Total assets................................................ $240,914 $243,898
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line............................................. $ 37,200 $ 21,500
Accounts payable.................................................. 62,838 69,143
Accrued liabilities............................................... 22,147 32,710
Current maturities of long-term debt.............................. 4,031 4,609
-------- --------
Total current liabilities................................... 126,216 127,962
Deferred rent........................................................ 4,370 4,107
Convertible subordinated debt........................................ 49,421 49,421
Long-term debt, other................................................ 11,470 13,863
Shareholders' equity:
Preferred stock, authorized 2,000,000
shares, none issued............................................. - -
Common stock, stated value $.10 per share,
authorized 28,000,000, issued and out
standing 13,153,000 at November 30, 1996
and 13,184,000 at March 2, 1996................................ 1,315 1,318
Additional paid-in capital........................................ 31,994 32,121
Retained earnings................................................. 16,128 15,106
-------- --------
Total shareholders' equity.................................. 49,437 48,545
-------- --------
Total liabilities and shareholders'
equity...................................................... $240,914 $243,898
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 25, November 30, November 25,
1996 1995 1996 1995
--------------------------------- --------------------------------
(Unaudited)
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Net sales........................................ $206,219 $170,954 $625,535 $503,839
Cost of sales.................................... 161,032 134,059 490,898 395,618
------- ------- ------- -------
45,187 36,895 134,637 108,221
Selling, administrative and
occupancy expenses............................ 42,695 34,680 126,942 101,653
------- ------- ------- -------
Operating income................................. 2,492 2,215 7,695 6,568
Interest expense, net............................ 2,040 1,638 5,991 4,398
------- ------- ------- -------
Income before provision for
income taxes.................................. 452 577 1,704 2,170
Provision for income taxes....................... 181 230 682 868
------- ------- ------- -------
Net income....................................... $ 271 $ 347 $ 1,022 $ 1,302
======== ======== ======== ========
Net income per share............................. $.02 $.03 $.08 $.10
======== ======== ======== ========
Weighted average number of com-
mon shares used in computing
net income per share.......................... 13,153 13,183 13,174 13,182
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
November 30, November 25,
1996 1995
------------------- ------------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income ............................................................. $ 1,022 $ 1,302
Adjustments to reconcile to cash provided by
operations:
Depreciation and amortization......................................... 6,039 5,587
LIFO provision........................................................ 2,535 2,253
Cash provided by (used for) current assets and liabilities:
Accounts payable and other current liabili ties.................... (17,980) 29,021
Accounts receivable................................................ (3,431) (1,453)
Inventories at current cost........................................ 10,402 (28,124)
Other.............................................................. 3,006 1,664
------- -------
Net cash provided by operating activities.............................. 1,593 10,250
Investing activities:
Purchase of property and equipment, net................................. (3,990) (1,620)
Payment for purchase of retail stores, net
of cash acquired...................................................... (10,093) (40,644)
------- -------
Net cash (used for) investing activities................................ (14,083) (42,264)
Financing activities:
Net borrowings under revolving credit line.............................. 15,700 33,240
Net repayments and other................................................ (3,101) (2,209)
------- -------
Net cash provided by financing activities.............................. 12,599 31,031
------- -------
Increase (decrease) in cash and cash equivalents.......................... 109 (983)
Cash and cash equivalents, beginning of period............................ 767 1,722
------- -------
Cash and cash equivalents, end of period.................................. $ 876 $ 739
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial statements include the accounts of Drug
Emporium, Inc. and subsidiaries.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary to fairly present the consolidated
financial position, results of operations and cash flows on a consistent
basis. Certain amounts in prior period financial statements have been
reclassified to conform with the current presentation.
2. The Company's cost of sales is computed using the gross profit method. The
gross profit percentage used is validated by physical inventories conducted
twice a year primarily in the second and fourth quarters and the actual
results of the LIFO calculations in the fourth quarter.
3. The accompanying unaudited consolidated financial statements are presented
in accordance with the requirements for Form 10-Q and consequently do not
include all the disclosures normally required by generally accepted
accounting principles. Reference should be made to the Company's Form 10-K
for the fiscal year ended March 2, 1996 (File No. 0-16998) for additional
disclosures including a summary of the Company's accounting policies, which
have not significantly changed.
4. On May 29, 1996, the Company completed a purchase of certain assets of six
stores in the Philadelphia market. The acquisition was accounted for as a
purchase. The consolidated statements of operations reflect the results of
operations of the stores since the date acquired.
5. The Company adopted SFAS 121 during the first quarter of the current fiscal
year. No charge has been recorded related to this adoption.
6. The Company signed an amendment to its bank credit Agreement (the "Agree-
ment") on May 24, 1996. The amendment increased the available borrowings to
help fund the acquisition of stores in the Philadelphia market.
The Agreement allows for a total credit facility of up to $75,000,000,
depending upon available collateral. On or before February 28, 1997, the
credit facility will be reduced by $5,000,000. The remaining amount
consists of a $55,000,000 revolver expiring on May 31, 1999 and term debt
of $15,000,000. The term debt is due in quarterly installments of $750,000.
As of November 30, 1996, the revolver balance was $37,200,000 and the term
debt balance was $13,500,000.
On December 13, 1996, the Company signed an amendment to the Agreement
which extends the term on the revolver to May 31, 2000, reduces the
commitment fee to .25% and improves the overall economics of the Agreement.
The interest rate on the Revolver and the term debt floats at the bank's
prime rate. The Agreement has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by the Company's
assets, including inventory and accounts receivable. The Agreement
prohibits the payment of dividends, stock repurchases, and acquisition of
the Company's convertible subordinated debentures.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth selected items from the Company's consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 25, November 30, November 25,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales (in thousands)......................... $206,219 $170,954 $625,535 $503,839
======== ======== ======== ========
Gross margin..................................... 21.9% 21.6% 21.5% 21.5%
Selling, administrative and
occupancy expenses............................... 20.7% 20.3% 20.3% 20.2%
-------- -------- -------- --------
1.2% 1.3% 1.2% 1.3%
======== ======== ======== ========
</TABLE>
For the quarter, net sales increased 21% compared to the same period last
year. This was a result of a larger store base and an increase in average sales
per store. The increase in average sales per store was partially brought about
by the acquisition of higher-volume stores and the closing of under-performing
units. For stores open last year and this year, sales increased one-half percent
for the nine months and were flat for the three months ended November 30, 1996.
The changes in sales were largely due to changes in the level of promotional
activity.
The following table lists corporately-owned store openings and store closings
through the third quarter ended November 30, 1996 and the similar prior year
period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 25, November 30, November 25,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of stores at
beginning of period............................. 141 114 136 113
Stores opened or acquired......................... 1 26 9 34
Stores closed or sold............................. (2) - (5) (7)
--- --- --- ---
Total stores at end of
period.......................................... 140 140 140 140
=== === === ===
</TABLE>
The Company has anticipated downward pressure on gross margins, particularly
in pharmacy, as sales through managed care networks continue to increase as a
percentage of pharmacy sales. Management's goal is to offset this downward
pressure on margins by, among other measures, utilizing scanning data to improve
overall category gross margins where opportunities allow, while at the same time
protecting the low price image of the stores.
Selling, administrative and occupancy expenses as a percentage of sales
increased slightly in the third quarter of Fiscal 1997 compared to the similar
prior year period. The increase primarily resulted from the impact of costs
associated with acquired stores. Interest expense has increased over prior
periods as a result of additional debt brought about by the acquisition of
stores.
7
<PAGE> 8
Inventory Valuation
- -------------------
The Company uses the LIFO method of accounting for its inventories. Under
this method, the cost of merchandise sold and reported in the financial
statements approximates current cost.
The Company, in computing its LIFO charge throughout the fiscal year, uses an
estimated percentage rate of inflation. The estimated inflation rate used in the
table below was two percent for all periods. This LIFO charge is adjusted at
each year-end based upon the actual weighted average percentage rate of
inflation during the fiscal year. Adjustments to the LIFO charge, if any, will
be reflected in the fourth quarter.
The table below sets forth the LIFO charge for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 25 November 30, November 25,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
LIFO charge (in thousands)........................ $845 $751 $2,535 $2,253
==== ==== ====== ======
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Company signed an amendment to its bank credit Agreement (the
"Agreement") on May 24, 1996. The amendment increased the available borrowings
to help fund the acquisition of stores in the Philadelphia market.
On December 13, 1996, the Company signed an amendment to the Agreement which
extends the term on the revolver to May 31, 2000, reduces the commitment fee to
.25% and improves the overall economics of the Agreement.
The Company believes that internally generated funds and borrowings available
under its Agreement are sufficient to finance the Company's current operations.
8
<PAGE> 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are included herein:
--Exhibit 11. Computation of earnings per share.
--Exhibit 27. Financial Data Schedule.
(b) No report on Form 8-K was filed during the quarter
ended November 30, 1996.
9
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUG EMPORIUM, INC.
-----------------------------
(Registrant)
Date January 14, 1997 By /s/ David L. Kriegel
------------------------ ----------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date January 14, 1997 By /s/ Timothy S. McCord
------------------------ ----------------------------
Timothy S. McCord
Chief Financial Officer
10
<PAGE> 1
DRUG EMPORIUM, INC.
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 25, November 30, November 25,
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of
common shares outstanding....................... 13,153 13,183 13,174 13,182
Net effect of dilutive stock
options -- based on treasury
stock method using estimated
average market price............................ (a) (a) (a) (a)
------ ------ ------ ------
Weighted average common and
common equivalent shares........................ 13,153 13,183 13,174 13,182
====== ====== ====== ======
Net income ..................................... $271 $347 $1,022 $1,302
====== ====== ====== ======
Net income per common and com
mon equivalent share............................ $0.02 $0.03 $0.08 $0.10
====== ====== ====== ======
Fully Diluted:
Weighted average number of
common shares outstanding....................... 13,153 13,183 13,174 13,182
Net effect of dilutive stock
options -- based on treasury
stock method using closing
market price.................................... (a) (a) (a) (a)
------ ------ ------ ------
Fully diluted shares............................ 13,153 13,183 13,174 13,182
====== ====== ====== ======
Net income ..................................... $271 $347 $1,022 $1,302
====== ====== ====== ======
Net income per common share
assuming full dilution.......................... $0.02 $0.03 $0.08 $0.10
====== ====== ====== ======
<FN>
(a) Excluded as amounts are antidilutive.
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 876
<SECURITIES> 0
<RECEIVABLES> 16,449
<ALLOWANCES> 0
<INVENTORY> 182,822
<CURRENT-ASSETS> 202,934
<PP&E> 66,935
<DEPRECIATION> 35,541
<TOTAL-ASSETS> 240,914
<CURRENT-LIABILITIES> 126,216
<BONDS> 49,421
<COMMON> 1,315
0
0
<OTHER-SE> 48,122
<TOTAL-LIABILITY-AND-EQUITY> 240,914
<SALES> 625,535
<TOTAL-REVENUES> 625,535
<CGS> 490,898
<TOTAL-COSTS> 617,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,991
<INCOME-PRETAX> 1,704
<INCOME-TAX> 682
<INCOME-CONTINUING> 1,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,022
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
