<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
August 30, 1997 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 548-7080
--------------------
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at 08/30/97
- ---------------------------- ------------
Common Stock, $.10 par value 13,179,785 shares
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INDEX
DRUG EMPORIUM, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets..............................................................3
Consolidated Statements of Operations..............................................................4
Consolidated Statements of Cash Flows .............................................................5
Notes to Consolidated Financial Statements.........................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................7-8
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders............................................9
Item 6. Exhibits and Reports on Form 8-K...............................................................9
SIGNATURES.................................................................................................10
- ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- ---------------------------------------------------
PER SHARE.........................................................................................11
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</TABLE>
2
<PAGE> 3
DRUG EMPORIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 30, 1997 March 1, 1997
--------------- -------------
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............... $ 768 $ 779
Accounts receivable ..................... 16,769 14,525
Inventories, net of LIFO reserve of $22.8
million and $21.0 million at August 30,
1997 and March 1, 1997, respectively .. 162,541 187,949
Income taxes and other .................. 1,542 3,278
-------- --------
Total current assets .............. 181,620 206,531
Property and equipment, net ................ 28,682 30,412
Goodwill ................................... 4,488 4,763
Other assets ............................... 1,477 1,613
-------- --------
Total assets ...................... $216,267 $243,319
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line ................... $ 31,100 $ 41,600
Accounts payable ........................ 53,020 64,571
Accrued liabilities ..................... 13,020 15,142
Deferred income ......................... 3,461 4,966
Current maturities of long-term debt .... 3,213 3,950
-------- --------
Total current liabilities ......... 103,814 130,229
Deferred rent .............................. 4,197 4,192
Convertible subordinated debt .............. 49,421 49,421
Long-term debt, other ...................... 8,335 9,910
-------- --------
Total long-term debt .............. 57,756 59,331
Shareholders' equity:
Preferred stock, authorized 2,000,000
shares, none issued ................... -- --
Common stock, stated value $.10 per
share, authorized 28,000,000, issued
and outstanding 13,179,785 at August
30, 1997 and 13,153,485 at March 1,
1997 .................................. 1,318 1,315
Additional paid-in capital .............. 32,123 31,994
Retained earnings ....................... 17,059 16,258
-------- --------
Total shareholders' equity ........ 50,500 49,567
-------- --------
Total liabilities and shareholders'
equity .......................... $216,267 $243,319
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 30, August 31, August 30, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited)
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Net sales ................. $204,235 $212,573 $413,449 $419,316
Cost of sales ............. 160,686 166,651 325,278 329,866
-------- -------- -------- --------
Gross margin ..... 43,549 45,922 88,171 89,450
Selling, administrative and
occupancy expenses ...... 41,131 43,448 82,695 84,247
-------- -------- -------- --------
Operating income .......... 2,418 2,474 5,476 5,203
Interest expense, net ..... 1,961 2,057 4,140 3,951
-------- -------- -------- --------
Income before provision for
income taxes ............ 457 417 1,336 1,252
Provision for income taxes.. 183 167 534 501
-------- -------- -------- --------
Net income ................ $ 274 $ 250 $ 802 $ 751
======== ======== ======== ========
Net income per share ...... $ .02 $ .02 $ .06 $ .06
======== ======== ======== ========
Weighted average number of
common shares used in
computing net income per
share ................... 13,180 13,184 13,180 13,184
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
August 30, August 31,
1997 1996
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income ..................................... $ 802 $ 751
Adjustments to reconcile to cash
provided by operations:
Depreciation and amortization ................ 3,311 3,958
LIFO provision ............................... 1,742 1,690
Cash provided by (used for) current assets and
liabilities:
Accounts payable and accrued liabilities ..... (15,087) (30,388)
Accounts receivable .......................... (2,244) (2,693)
Inventories at current cost .................. 23,666 29,460
Other ........................................ 1,645 2,208
-------- --------
Net cash provided by operating activities ...... 13,835 4,986
Investing activities:
Purchase of property and equipment, net ........ (1,166) (2,504)
Payment for purchase of retail stores, net
of cash acquired ............................. -- (10,093)
-------- --------
Net cash (used for) investing activities ....... (1,166) (12,597)
Financing activities:
Net borrowings (repayments) under revolving
credit line .................................. (10,500) 10,650
Net repayments and other ....................... (2,180) (2,972)
-------- --------
Net cash provided by (used for) financing
activities ................................... (12,680) 7,678
-------- --------
Increase (decrease) in cash and cash
equivalents .................................. (11) 67
Cash and cash equivalents, beginning of
period ....................................... 779 767
-------- --------
Cash and cash equivalents, end of period ......... $ 768 $ 834
======== ========
</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 1, 1997 (File
No. 0-16998) for additional disclosures including a summary of the
Company's accounting policies, which have not significantly changed.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth selected items from the Company's consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 30, August 31, August 30, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales (in thousands) ............ $204,235 $212,573 $413,449 $491,316
======== ======== ======== ========
Gross margin ........................ 21.3% 21.6% 21.3% 21.3%
Selling, administrative and occupancy
expenses ............................ 20.1% 20.4% 20.0% 20.1%
-------- -------- -------- --------
1.2% 1.2% 1.3% 1.2%
======== ======== ======== ========
</TABLE>
For the quarter, net sales decreased as a result of a smaller weighted
average store base, partially offset by a .2% increase in comparable store
sales.
The following table lists corporately-owned store openings and store closings
through the second quarter ended August 30, 1997 and the similar prior year
period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 30, August 31, August 30, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of stores at
beginning of period .......... 138 141 138 136
Stores opened or acquired....... 0 2 0 8
Stores closed or sold .......... (2) (2) (2) (3)
---- ---- ---- ----
Total stores at end of
period ....................... 136 141 136 141
==== ==== ==== ====
</TABLE>
Gross margin as a percentage of sales decreased during the three-month period
ended August 30, 1997 over the comparable prior year period. This decrease
resulted from selective reductions in the retail prices of competitive items,
third-party pharmacy plan activity, promotional activity and physical inventory
adjustments, partially offset by vendor deals, reduced product costs,
selectively strengthened product pricing and category management.
Selling, administrative and occupancy expenses were lower as a percentage of
sales for the three-month period ended August 30, 1997 over the comparable prior
year period due to lower net advertising costs, partially offset by increased
wage pressures primarily due to changes in the minimum wage.
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
7
<PAGE> 8
each year end based upon the actual weighted average percentage rate of
inflation during the fiscal year.
The table below sets forth the LIFO charge for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 30, August 31, August 30, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LIFO charge (in thousands)........................ $871 $845 $1,742 $1,690
==== ==== ====== ======
</TABLE>
Liquidity and Capital Resources
The Company has a bank credit agreement (the "Agreement") which governs its
borrowings under its bank credit facilities. The Agreement is amended from time
to time to increase or decrease borrowing capacity based on projected seasonal
needs.
As of August 30, 1997, the total credit facility under the Agreement allowed
for borrowings of up to $70,500,000, depending upon available collateral. On
August 31, 1997, the credit facility was reduced, as scheduled, by $5,000,000.
The remaining $55,000,000 revolver expires on May 31, 2000, while the remaining
term debt of $10,500,000 is due in quarterly installments of $750,000, payable
at the end of each of the Company's fiscal quarters.
The Company believes that internally generated funds and borrowings available
under its Agreement are sufficient to finance the Company's current operations.
8
<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the stockholders of Drug Emporium, Inc. was held
on June 25, 1997. The items voted on at the meeting were the election
of directors, ratification of Ernst & Young LLP as the independent
auditors, and two stockholder proposals. The proxies for the meeting
were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934. There was no solicitation in opposition to management's
nominees and all such nominees were elected.
The following persons were elected as directors for a three-year term:
<TABLE>
<CAPTION>
Votes Withheld Broker
Name For Authority Non-Votes
---- --------- --------- ---------
<S> <C> <C> <C>
Macy T. Block 11,177,715 753,615 0
Thomas D. Igoe 11,174,879 756,451 0
David L. Kriegel 11,171,729 759,601 0
</TABLE>
The following summarizes the vote with respect to the other matters:
<TABLE>
<CAPTION>
APPOINTMENT OF AUDITORS
-----------------------
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
11,876,263 34,941 20,126 0
</TABLE>
<TABLE>
<CAPTION>
ELIMINATION OF DIRECTOR CLASSES
-------------------------------
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
4,309,430 5,460,964 98,597 2,062,338
</TABLE>
<TABLE>
<CAPTION>
RETENTION OF INVESTMENT BANKER
------------------------------
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
722,651 9,033,350 112,631 2,062,698
</TABLE>
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) A report on Form 8-K as of June 25, 1997 was filed on July
10, 1997, listing matters submitted to a vote of security
holders at the Annual Meeting held June 25, 1997, as well
as a news article related to the Annual Meeting.
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 September 19, 1997 By /s/ David L. Kriegel
---------------------- ------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date September 19, 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 Six Months Ended
August 30, August 31, August 30, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common shares
outstanding ............................. 13,180 13,184 13,180 13,184
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 ............................ 13,180 13,184 13,180 13,184
======= ======= ======= =======
Net income .............................. $ 274 $ 250 $ 802 $ 751
======= ======= ======= =======
Net income per common and common
equivalent share ........................ $ .02 $ .02 $ .06 $ .06
======= ======= ======= =======
Fully Diluted:
Weighted average number of common shares
outstanding ............................. 13,180 13,184 13,180 13,184
Net effect of dilutive stock options --
based on treasury stock method using
closing market price .................... (a) (a) (a) (a)
------- ------- ------- -------
Fully diluted shares .................... 13,180 13,184 13,180 13,184
======= ======= ======= =======
Net income .............................. $ 274 $ 250 $ 802 $ 751
======= ======= ======= =======
Net income per common share assuming full
dilution ................................ $ .02 $ .02 $ .06 $ .06
======= ======= ======= =======
</TABLE>
(a) Excluded as amounts are antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> AUG-30-1997
<EXCHANGE-RATE> 1
<CASH> 768
<SECURITIES> 0
<RECEIVABLES> 16,769
<ALLOWANCES> 0
<INVENTORY> 162,541
<CURRENT-ASSETS> 181,620
<PP&E> 68,155
<DEPRECIATION> 39,473
<TOTAL-ASSETS> 216,267
<CURRENT-LIABILITIES> 103,814
<BONDS> 49,421
0
0
<COMMON> 1,318
<OTHER-SE> 49,182
<TOTAL-LIABILITY-AND-EQUITY> 216,267
<SALES> 413,449
<TOTAL-REVENUES> 413,449
<CGS> 325,278
<TOTAL-COSTS> 407,973
<OTHER-EXPENSES> 82,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,140
<INCOME-PRETAX> 1,336
<INCOME-TAX> 534
<INCOME-CONTINUING> 802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 802
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
