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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
May 31, 1997 OR
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[ ] 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.
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(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 05/31/97
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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.
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<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
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Item 6. Exhibits and Reports on Form 8-K...............................................................9
SIGNATURES.................................................................................................10
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EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE..............................................11
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</TABLE>
2
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DRUG EMPORIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, 1997 March 1, 1997
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(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 748 $ 779
Accounts receivable............................................ 15,052 14,525
Inventories, net of LIFO reserve of
$21.9 million and $21.0 at May 31,
1997 and March 1, 1997, respectively....................... 185,442 187,949
Income taxes and other......................................... 2,091 3,278
-------- --------
Total current assets..................................... 203,333 206,531
Property and equipment, net....................................... 29,655 30,412
Goodwill.......................................................... 4,625 4,763
Other assets...................................................... 1,528 1,613
-------- --------
Total assets............................................. $239,141 $243,319
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line.......................................... $ 45,700 $ 41,600
Accounts payable............................................... 58,132 64,571
Accrued liabilities............................................ 15,057 15,142
Deferred income................................................ 4,061 4,966
Current maturities of long-term debt........................... 3,223 3,950
-------- --------
Total current liabilities................................ 126,173 130,229
Deferred rent..................................................... 4,183 4,192
Convertible subordinated debt..................................... 49,421 49,421
Long-term debt, other............................................. 9,137 9,910
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Total long-term debt 58,558 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 May 31,
1997 and 13,153,485 at March 1, 1997......................... 1,318 1,315
Additional paid-in capital..................................... 32,123 31,994
Retained earnings.............................................. 16,786 16,258
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Total shareholders' equity............................... 50,227 49,567
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Total liabilities and shareholders'
equity................................................. $239,141 $243,319
======== ========
</TABLE>
3
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DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1997 June 1, 1996
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(Unaudited)
(In thousands,
except per-share data)
<S> <C> <C>
Net sales.................................................................. $209,214 $206,743
Cost of sales.............................................................. 164,592 163,215
-------- --------
Gross margin 44,622 43,528
Selling, administrative and occupancy expenses............................. 41,564 40,799
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Operating income before store closure expense.............................. 3,058 2,729
Interest expense, net...................................................... 2,179 1,894
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Income before provision for income taxes................................... 879 835
Provision for income taxes................................................. 351 334
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Net income ................................................................ $ 528 $ 501
======== ========
Net income per share....................................................... $.04 $.04
==== ====
Weighted average number of common shares used
in computing net income per share....................................... 13,179 13,184
====== ======
</TABLE>
4
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DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1997 June 1, 1996
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(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income ........................................................ $ 528 $ 501
Adjustments to reconcile to cash
provided by (used for) operations:
Depreciation and amortization.................................... 1,607 1,912
LIFO provision................................................... 871 845
Cash provided by current assets and
liabilities:
Accounts payable and accrued liabilities (7,505) (3,138)
Accounts receivable.............................................. (527) (1,385)
Inventories at current cost...................................... 1,636 6,413
Other............................................................ 1,189 (116)
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Net cash provided by operating activities.......................... (2,201) 5,032
Investing activities:
Purchase of property and equipment, net............................ (562) (1,245)
Payment for purchase of retail stores, net
of cash acquired................................................. -- (8,716)
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Net cash (used for) investing activities........................... (562) (9,961)
Financing activities:
Net borrowings under revolving credit line......................... 4,100 6,800
Net repayments and other........................................... (1,368) (1,800)
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Net cash provided by (used for)
financing activities............................................ 2,732 5,000
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Increase (decrease) in cash and cash
equivalents...................................................... (31) 71
Cash and cash equivalents, beginning of
period........................................................... 779 767
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Cash and cash equivalents, end of period............................. $ 748 $ 838
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</TABLE>
See accompanying notes.
5
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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 may 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.
4. 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 May 31, 1997, the total credit facility under the Agreement allowed for
borrowings of up to $72,000,000, depending upon available collateral. On or
before August 31, 1997, the credit facility will be reduced by $5,000,000.
The remaining $55,000,000 revolver expires on May 31, 2000, while the
remaining term debt of $12,000,000 is due in quarterly install ments of
$750,000, payable at the end of each of the Company's fiscal quarters.
The interest rate on the Revolver and the term debt float at the bank's prime
rate. The Agreement requires a commitment fee on the revolver of .25% on the
unused available credit and has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by the Company's
assets, including inventory and accounts receivable. The Agreement prohibits
the payment of dividends, stock repurchases, and acquisition of the Company's
convertible subordinated debentures.
6
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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
May 31, 1997 June 1, 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Net sales (in thousands)........................... $209,214 $206,743
Gross margin....................................... 21.3% 21.0%
Selling, administrative and occupancy expenses..... 19.8% 19.7%
1.5% 1.3%
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</TABLE>
For the quarter, net sales increased 1% compared to the same period last
year. This was a result of a larger weighted average store base, offset by a 1%
decline in comparable store sales.
The following table lists corporately-owned store openings and store
closings through the first quarter ended May 31, 1997 and the similar prior
year period.
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1997 June 1, 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Number of stores at
beginning of period........................... 138 136
Stores opened or acquired....................... 0 6
Stores closed or sold........................... 0 -1
Total stores at end of period 138 141
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</TABLE>
Gross margin as a percentage of sales increased during the three month
period ended May 31, 1997 over the comparable prior year period. This increase
resulted from an emphasis on reduced product costs, selectively strengthened
product pricing and category management, partially offset by selective
reductions in the retail prices of competitive items and promotional activity.
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
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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
May 31, 1997 June 1, 1996
------------ ------------
(In thousands)
<S> <C> <C>
LIFO charge....................................... $871 $845
==== ====
</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 May 31, 1997, the total credit facility under the Agreement allowed
for borrowings of up to $72,000,000, depending upon available collateral. On or
before August 31, 1997, the credit facility will be reduced by $5,000,000. The
remaining $55,000,000 revolver expires on May 31, 2000, while the remaining
term debt of $12,000,000 is due in quarterly installments of $750,000, payable
at the end of each of the Company's fiscal quarters.
The interest rate on the Revolver and the term debt float at the bank's
prime rate. The Agreement requires a commitment fee on the revolver of .25% on
the unused available credit and has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by the Company's
assets, including inventory and accounts receivable. The Agreement prohibits
the payment of dividends, stock repurchases, and acquisition of the Company's
convertible subordinated debentures.
8
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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
May 31, 1997.
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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.
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(Registrant)
Date June 24, 1997 By /s/ David L. Kriegel
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David L. Kriegel Chairman
Chief Executive Officer
Date June 24, 1997 By /s/ Timothy S. McCord
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Timothy S. McCord
Chief Financial Officer
10
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DRUG EMPORIUM, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1997 June 1, 1996
------------ ------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C>
Primary:
Weighted average number of common shares out-standing.................... 13,179 13,184
Net effect of dilutive stock options -- based on
treasury stock method using estimated average
market price............................................................. (a) (a)
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Weighted average common and common equivalent shares..................... 13,179 13,184
====== ======
Net income .............................................................. $528 $501
==== ====
Net income per common and common equivalent share........................ $.04 $.04
==== ====
Fully Diluted:
Weighted average number of common shares out-standing.................... 13,179 13,184
Net effect of dilutive stock options -- based on
treasury stock method using closing market price......................... (a) (a)
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Fully diluted shares..................................................... 13,179 13,184
====== ======
Net income .............................................................. $528 $501
==== ====
Net income per common share assuming full dilution....................... $.04 $.04
==== ====
</TABLE>
(a) Excluded as amounts are antidilutive.
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 748
<SECURITIES> 0
<RECEIVABLES> 15,052
<ALLOWANCES> 0
<INVENTORY> 185,442
<CURRENT-ASSETS> 203,333
<PP&E> 68,145
<DEPRECIATION> 38,490
<TOTAL-ASSETS> 239,141
<CURRENT-LIABILITIES> 126,173
<BONDS> 58,558
0
0
<COMMON> 1,318
<OTHER-SE> 48,909
<TOTAL-LIABILITY-AND-EQUITY> 239,141
<SALES> 209,214
<TOTAL-REVENUES> 209,214
<CGS> 164,592
<TOTAL-COSTS> 206,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,179
<INCOME-PRETAX> 879
<INCOME-TAX> 351
<INCOME-CONTINUING> 528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 528
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
