<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 29, 1998 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ TO
___________________
Commission File Number 0-16998
-------
DRUG EMPORIUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1064888
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
155 Hidden Ravines Drive, Powell, Ohio 43065
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 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 August 29, 1998
- ----------------------------- ----------------
Common Stock, $ .10 par value 13,179,785 shares
------------
<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. . . . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 8-11
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
2
<PAGE> 3
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
August 29, 1998 February 28, 1998
------------------- --------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 794 $ 783
Accounts receivable . . . . . . . . . . . . . . . 11,545 17,410
Inventories, net of LIFO reserve of $23.1
million and $21.8 million at August 29,
1998 and February 28, 1998, respectively . . . 160,424 167,292
Income taxes and other . . . . . . . . . . . . . . 1,813 1,692
------------------- ------------------
Total current assets . . . . . . . . . . . 174,576 187,177
Property and equipment, net. . . . . . . . . . . . . 24,400 26,777
Goodwill. . . . . . . . . . . . . . . . . . . . . . 3,940 4,215
Other assets . . . . . . . . . . . . . . . . . . . . 2,395 1,615
------------------- ------------------
Total assets . . . . . . . . . . . . . . $205,311 $219,784
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line . . . . . . . . . . . . . $ 6,800 $ 22,200
Accounts payable . . . . . . . . . . . . . . . 58,396 64,025
Accrued liabilities . . . . . . . . . . . . . . 19,865 14,785
Deferred income . . . . . . . . . . . . . . . . 2,985 3,679
Current maturities of long-term debt . . . . . 3,258 3,375
------------------- ------------------
Total current liabilities . . . . . . . 91,304 108,064
Deferred rent . . . . . . . . . . . . . . . . . . . 4,039 4,164
Convertible subordinated debt . . . . . . . . . . . 49,421 49,421
Long-term debt, other . . . . . . . . . . . . . . . 5,143 6,745
------------------- ------------------
Total long-term debt . . . . . . . . . 54,564 56,166
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 29, 1998
and 13,179,785 at February 28, 1998 . . . . . 1,318 1,318
Additional paid-in capital . . . . . . . . . . . . 32,123 32,123
Retained earnings . . . . . . . . . . . . . . . . 21,963 17,949
------------------- ------------------
Total shareholders' equity . . . . . . . 55,404 51,390
------------------- ------------------
Total liabilities and shareholders' equity $205,311 $219,784
=================== ==================
</TABLE>
See accompanying notes.
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 29, 1998 August 30, 1997 August 29, 1998 August 30, 1997
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . $204,845 $204,235 $414,017 $413,449
Cost of sales . . . . . . . . 162,275 160,686 327,818 325,278
------------- ------------- --------------- ---------------
Gross Margin . . . . . . . 42,570 43,549 86,199 88,171
Selling, administrative and
occupancy expenses . . . . 42,486 41,131 83,248 82,695
Special charges (credits) . . . (6,760) -- (6,760) --
Interest expense, net . . . . 1,361 1,961 2,927 4,140
------------- ------------- --------------- ---------------
Income before provision for
income taxes . . . . . . . . . 5,483 457 6,784 1,336
Provision for income taxes . 2,197 183 2,770 534
------------- ------------- --------------- ---------------
Net income . . . . . . . . . . $ 3,286 $ 274 $ 4,014 $ 802
============= ============= =============== ===============
Earnings per common share:
Basic . . . . . . . . . . . $ .25 $ .02 $ .30 $ .06
============= ============= =============== ===============
Diluted . . . . . . . . . . $ .24 $ .02 $ .30 $ .06
============= ============= =============== ===============
Weighted average number of
Common shares outstanding:
Basic . . . . . . . . . . . 13,180 13,180 13,180 13,180
============= ============= =============== ===============
Diluted . . . . . . . . . . 16,408 13,208 13,189 13,208
============= ============= =============== ===============
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
August 29, 1998 August 30, 1997
------------------------ ---------------------
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 4,014 $ 802
Adjustments to reconcile to cash provided by Operations:
Depreciation and amortization . . . . . . . . . 4,861 3,311
LIFO provision . . . . . . . . . . . . . . . . 1,300 1,742
Cash provided by (used for) current assets and liabilities:
Accounts payable and accrued liabilities . . . (1,243) (15,087)
Accounts receivable . . . . . . . . . . . . . . 5,865 (2,244)
Inventories at current cost . . . . . . . . . . 5,568 23,666
Other . . . . . . . . . . . . . . . . . . . . . (981) 1,645
------------------------ ---------------------
Net cash provided by operating activities . . . . 19,384 13,835
Investing activities:
Purchase of property and equipment, net . . . . (2,254) (1,166)
------------------------ ---------------------
Net cash used in investing activities . . . . . . . . (2,254) (1,166)
Financing activities:
Net borrowings (repayments) under revolving
credit line . . . . . . . . . . . . . . . . . . (15,400) (10,500)
Net repayments on term debt and other . . . . . (1,719) (2,180)
------------------------ ---------------------
Net cash used in financing activities . . . . . . . (17,119) (12,680)
------------------------ ---------------------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . 11 (11)
Cash and cash equivalents, beginning of period 783 779
------------------------ ---------------------
Cash and cash equivalents, end of period . . . . . . $ 794 $ 768
======================== =====================
</TABLE>
See accompanying notes.
5
<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated 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 following table sets forth the computation of basic and diluted
earnings.
<TABLE>
<CAPTION>
(Unaudited) (In thousands, except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
August 29, 1998 August 30, 1997 August 29, 1998 August 30, 1997
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income and numerator for
Basic earnings per share -
income available to common
stockholders . . . . . . . . . $3,286 $ 274 $4,014 $ 802
Effect of dilutive securities:
7.75% convertible
debentures . . . . . . . . 575 (A) (A) (A)
---------------- --------------- ---------------- ---------------
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions . . . . . . $3,861 $ 274 $4,014 $ 802
================ =============== ================ ===============
Denominator:
Denominator for basic earnings
Per share - weighted-
average shares . . . . . . . . 13,180 13,180 13,180 13,180
Effect of dilutive securities:
Employee stock options (B) 8 28 9 28
7.75% convertible
debentures (A) . . . . . 3,220 -- -- --
---------------- --------------- ---------------- ---------------
Denominator for diluted earnings
Per share-adjusted weighted
-average shares and assumed
conversions . . . . . . . . . 16,408 13,208 13,189 13,208
================ =============== ================ ===============
Basic earnings per share . . . . $ .25 $ .02 $ .30 $ .06
================ =============== ================ ===============
Diluted earnings per share . . . . $ .24 $ .02 $ .30 $ .06
================ =============== ================ ===============
</TABLE>
(A) The effect of the 7.75% convertible debentures is antidilutive and thus
excluded in the calculation of Diluted earnings per share.
(B) The additional options to purchase shares of common stock were outstanding
during each period but were not included in the computation of diluted
earnings per share because the exercise price of the options was greater
than the average market price of the common shares and, therefore, the
effect would be antidilutive.
6
<PAGE> 7
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. The Company entered into an agreement with Western Drug Distributors,
Inc., its franchise store operator in the Seattle and Portland area, to
terminate Western's Franchise agreement related to the sale of Western
Drug to Longs Drug Stores of Walnut Creek, California. The Company's
agreement with Western Drug provided for a one-time lump sum payment to
Drug Emporium, Inc. of $15.4 million. Approximately $14.4 million of
the payment was related to the buyout and is recorded as a special
credit in the Company's Statement of Operations. The remaining amounts
of the payment relate primarily to franchise fee receivables accrued in
the normal course of business, reimbursements for legal costs and
interest.
5. As a result of an ongoing review of its business operations, the
Company recorded special and nonrecurring charges in its second quarter
of $9.4 million. The charges include a noncash component of $1.3
million to write down store equipment, fixtures and leasehold
improvements at store locations to be closed, an accrual of $6.4
million to close seven underperforming store locations and record
additional costs related to the Washington, D. C. area vacant store
locations, and $1.7 million recorded as a component of gross margin in
the current period statement of operations due to store closure-related
inventory liquidations and other inventory writedowns. The
non-recurring inventory-related costs of the special charge have been
recorded as a component of gross margin in accordance with Emerging
Issues Task Force (EITF) Issue No. 96 - 9.
6. 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 February 28, 1998
(File No. 0-16998) for additional disclosures including a summary of
the Company's accounting policies, which have not significantly
changed.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth selected items derived 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 29, 1998 August 30, 1997 August 29, 1998 August 30, 1997
---------------- ---------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales (in thousands) . . . . . . . . $204,845 $204,235 $414,017 $413,449
================ ================ =============== ===============
Gross margin . . . . . . . . . . . . . . 21.6% (1) 21.3% 21.2% (1) 21.3%
Selling, administrative and occupancy
expenses . . . . . . . . . . . . . . . 20.7% 20.1% 20.1% 20.0%
---------------- ---------------- --------------- ---------------
Operating income . . . . . . . . . . . . .9% (2) 1.2% 1.1% (2) 1.3%
================ ================ =============== ===============
</TABLE>
(1) Excluding nonrecurring store closure related inventory liquidations and
other inventory writedowns of $1.7 million.
(2) Excluding the effects of (1) above and the $6.4 million and $1.3 million of
special charges related to non-inventory store closure costs.
Despite having three fewer stores in the current quarter relative to
the comparable prior year period, total sales increased .3%, from $204.2 million
in the prior year to $204.8 million in the current year. For the year to date
six-month period, sales were $414.0 million compared to the prior year to date
sales of $413.4 million. The sales increases can be attributed to a comparable
store sales increase of 1.1% for the quarter and 1.5% for the year to date
period.
Gross margins for the quarter, after adjusting for the impact of
special charges, were higher than the prior year comparable period due to higher
non-pharmacy margins, partially offset by lower rebate income and lower pharmacy
margins. Also, operating expenses were higher due primarily to increased
advertising and depreciation expenses, partially offset by lower payroll costs.
Interest expense was lower than the prior year by $1.2 million as a result of
the Company's ongoing debt reduction plan which included the application of
funds received from the Seattle franchise buyout.
The following table lists corporately-owned stores openings and store
closing through the second quarter ended August 29, 1998 and the similar prior
year period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 29, 1998 August 30, 1997 August 29, 1998 August 30, 1997
---------------- ---------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Number of stores at beginning of period . . 134 138 135 138
Stores opened or acquired . . . . . . . . . 0 0 0 0
Stores closed or sold . . . . . . . . . . . (1) (2) (2) (2)
---------------- ---------------- --------------- ---------------
Total stores at end of period . . . . . . . 133 136 133 136
================ ================ =============== ===============
</TABLE>
8
<PAGE> 9
Special Charges and One-Time Gain Related to Seattle Franchise Buyout
- ---------------------------------------------------------------------
The impact of special charges and the one-time gain related to the
Seattle franchise buyout and a description of the components of the charges and
gain are shown below:
RECONCILIATION OF NET INCOME TO NET INCOME
BEFORE SPECIAL CHARGES AND ONE-TIME GAIN
(Unaudited) (In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 29, 1998 August 29, 1998
------------------- -------------------
<S> <C> <C>
Net Income $3,286 $4,014
Special charges, net of income tax (1) 5,613 5,613
One-time gain, net of income tax (2) (8,655) (8,655)
------------------- -------------------
Net income before special charges and one-time gain $ 244 $ 972
Per Share Calculations:
Earnings per share, as reported $ .25 $ .30
Impact of special charges .43 .43
Impact of one-time gain (.66) (.66)
------------------- -------------------
Earnings per share before special charges and one-time
gain $ .02 $ .07
</TABLE>
(1) In addition to the special charges of $6.4 million and $1.3 million
(pre-tax) related to non-inventory store closure costs, $1.7 million
(pretax) in special charges related to nonrecurring store closing inventory
liquidations and other inventory writedowns was recorded as a component of
gross margin.
(2) Gain on Seattle franchise buyout, after adjusting for franchise
receivables, interest income, and legal costs.
Special Charges
- ---------------
The Company recorded special and nonrecurring charges in its second
quarter of $9.4 million. The charges include a noncash component of $1.3 million
to write down store fixtures, equipment and leaseholds at store locations to be
closed, an accrual of $6.4 million to close seven underperforming store
locations and to record additional costs related to the Washington, D. C. area
vacant store locations, and $1.7 million recorded as a component of gross margin
resulting from store closure-related inventory liquidations and other inventory
writedowns. The nonrecurring inventory-related costs of the special charge have
been recorded as a component of gross margin in accordance with (EITF) Issue No.
96 - 9.
The Company anticipates that the store closures will be accretive to
earnings beginning late in the fourth quarter of the Company's current fiscal
year. The stores to be closed are not concentrated in a particular geographic
area. Although the Washington, D.C. vacant locations have taken the Company
longer than expected to sublease, the charge recorded will be the final expense
related to these locations as the charge covers 100% of the remaining lease
obligations on all of the Washington, D.C. locations which have not been
subleased. The increase in accrued liabilities at August 29, 1998 relative to
February 28, 1998 can be attributed primarily to increases in the store closing
reserves.
9
<PAGE> 10
One-Time Gain Related to Seattle Franchise Buyout
- -------------------------------------------------
The Company finalized its agreement with Western Drug Distributors,
Inc., its franchise store operator in the Seattle and Portland area, to
terminate Western's Franchise agreement related to the sale of Western Drug to
Longs Drug Stores of Walnut Creek, California. The Company's agreement with
Western Drug provided for a one-time lump sum payment to Drug Emporium, Inc. of
$15.4 million. Approximately $14.4 million of the payment was related to the
buyout and is recorded as Other Income in the Company's Statement of Operations.
The remaining amounts of the payment relate primarily to franchise fee
receivables accrued in the normal course of business, reimbursements for legal
costs and interest. Because franchise income is recorded as a reduction to
operating costs in the Company's Statement of Operations, the elimination of
franchise fees from this market results in an increase in annual operating costs
of approximately .2 % of sales, and a decrease in annual interest expense of
approximately .2 % of sales as measured from fiscal 1998 results.
Store Growth and Remodels
- -------------------------
The Company has plans to open approximately six new stores in the next
twelve months and continue its store growth after that time at a similar pace.
In addition, the Company has also been aggressively updating and remodeling its
existing store base. This renovation program is expected to result in a majority
of its stores having undergone some type of remodeling by the end of the next
fiscal year. To date, approximately one-fourth of the Company's stores have
experienced a major or minor remodel in the past twelve months.
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. In computing its LIFO charge throughout
the fiscal year, the Company uses an estimated percentage rate of inflation. The
estimated inflation rate used was one and one-half per cent in Fiscal 1999 and
two per cent in Fiscal 1998. This LIFO charge is adjusted at each year end based
upon the actual weighted average percentage rate of inflation during the year.
Liquidity and Capital Resources
- -------------------------------
The Company has a bank credit agreement ( the "Agreement" ) which
governs its borrowing under its bank credit facilities. As of August 29, 1998,
the total credit facility under the Agreement allowed for borrowings of up to
$62,500,000, depending upon available collateral. The credit facility consists
of a $55,000,000 revolver which expires on May 31, 2000, and term debt of
$7,500,000 which is due in quarterly installments of $750,000. The term debt is
payable at the end of each of the Company's fiscal quarters. As of August 29,
1998, the Company had excess availability under its revolving credit agreement
of $48,200,000. The Company believes that internally generated funds and
borrowings available under its Agreement are sufficient to finance its current
operations.
Year 2000
- ---------
The Company has completed its assessment of the Information
Technology-related (IT-related) systems for the Year 2000 issue. For IT-related
systems, the Company anticipates that the most critical systems will be Year
2000 compliant by the end of November of 1998, which includes its accounting
software, AS400 applications, pharmacy, payroll and host merchandising systems.
Processes which will not be compliant until the fourth quarter of the Company's
current fiscal year include the company's store register system (a new system is
currently being rolled out to all stores), certain older personal computers,
certain PC applications, vendor EDI documents and other applications. The
Company will complete its assessment of non-IT-related systems for Year 2000
compliance by the end of the third quarter of its current fiscal year. Major
non-IT-related systems utilized by the Company include the telephone systems and
store security systems, among others. If the Company determines that any non-IT-
related systems are not Year 2000 compliant, it will be necessary to adjust the
estimates of the cost of the Year 2000 remediation.
10
<PAGE> 11
The Company has surveyed and is working with its outside suppliers and
software vendors related to Year 2000 compliance. As it relates to the major
suppliers of the Company, some assurances related to Year 2000 readiness have
been received but not all vendors have indicated that they will be compliant
within the required time periods. The external software companies that the
company utilizes for pharmacy, merchandising, store register and accounting
systems have all provided the company with a certified Year 2000 compliant
version of their respective products.
The Company estimates that its Year 2000 effort is approximately 50%
complete as of the end of August of 1998 and will be 100% complete as of the end
of February of 1999. The Company's total estimate of Year 2000 compliance costs
are projected to be $1,150,000, with $1,000,000 estimated to be incurred related
to the purchase of hardware and software to be capitalized and $150,000 related
to costs which will be expensed as incurred. The Company expects to incur nearly
all of its Year 2000 costs during its current fiscal year. To date,
approximately 80% of these costs have been incurred. Most of the costs are
related to the hardware required to run the Year 2000 compliant version of the
in-store pharmacy system which was required to be implemented approximately one
year earlier than would otherwise have been necessary.
The Company currently does not have a contingency plan in the event of
a particular system not being Year 2000 compliant. Such a plan will be developed
if it becomes clear that the company is not going to achieve its scheduled
compliance objectives. If the Company does not become Year 2000 compliant in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company by impairing its ability to process customer
transactions, order and pay for merchandise for sale, and perform certain other
functions. In addition, although the Company has initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues and the Company has received some assurances regarding these
issues from its vendors, there is no guarantee that these third party systems
will be compliant and in the event of non-compliance would not have an adverse
effect on the Company. For example, if some of the Company's merchandise vendors
are not Year 2000 compliant it could impact the ability of the company to
procure merchandise from those vendors.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Forward-Looking Statements
- --------------------------
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as in certain other parts of this
report on Form 10-Q that look forward in time, which includes everything other
than historical information, are forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature. All such forward-looking statements are based on the
current expectations of management and are subject to, and are qualified by,
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by those statements. These risks and
uncertainties include, but are not limited to the high level of competition as
to price and selection from a variety of sources, the recent pressure on
pharmacy margins from managed care networks, the Company's ability to
economically eliminate under-performing stores, the Company's ability to
identify and address all Year 2000 issues and general economic conditions.
11
<PAGE> 12
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 24, 1998. The items voted on at the meeting were the election
of directors and the approval and ratification of Ernst & Young LLP as
the independent auditors. The proxies for the meeting were solicited
pursuant to Regulation 14 under the Securities Exchange Act of 1934.
There was no solicitation in opposition to management's nominees and
all such nominees were elected.
The following persons were elected as directors for a three-year term:
<TABLE>
<CAPTION>
Votes Withheld Broker
Name For Authority Non-Votes
----------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Robert S. Meeder, Sr. 10,902,364 192,156 0
William L. Sweet, Jr. 10,911,797 182,723 0
</TABLE>
The following summarizes the vote with respect to the ratification of
Ernst and Young LLP as the independent auditors:
APPOINTMENT OF AUDITORS
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
11,055,467 24,406 14,647 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibit is included herein:
-- Exhibit 27. Financial data schedule.
(b) A report on Form 8-K was filed on June 30, 1998, reporting
that on June 24, 1998 the Board of Directors of Drug Emporium,
Inc. authorized the adoption of an Amended and Restated Rights
Agreement.
(c) A report on Form 8-K was filed on July 24, 1998 reporting that
on July 14, 1998 the Company will receive a $15.4 million lump
sum payment upon the termination of Western Drug's franchise
obligations.
12
<PAGE> 13
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 ________________ By_________________________________
/s/ David L. Kriegel
David L. Kriegel
Chairman
Chief Executive Officer
Date ________________ By_________________________________
/s/ Michael P. Leach
Michael P. Leach
Chief Financial Officer
13
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