<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 29, 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 11/29/97
- ---------------------------- -----------------------
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 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.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 29, MARCH 1,
------------ --------
1997 1997
---- ----
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 774 $ 779
Accounts receivable .......................... 16,489 14,525
Inventories, net of LIFO reserve of $23.6
million and $21.0 million at November 29,
1997 and March 1, 1997, respectively ....... 182,569 187,949
Income taxes and other ....................... 2,300 3,278
-------- --------
Total current assets ..................... 202,132 206,531
Property and equipment, net .................... 28,011 30,412
Goodwill ....................................... 4,352 4,763
Other assets ................................... 1,587 1,613
-------- --------
Total assets ............................. $236,082 $243,319
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line ........................ $ 36,600 $ 41,600
Accounts payable ............................. 69,190 64,571
Accrued liabilities .......................... 10,892 15,142
Deferred income .............................. 3,445 4,966
Current maturities of long-term debt ......... 3,245 3,950
-------- --------
Total current liabilities ................ 123,372 130,229
Deferred rent .................................. 4,224 4,192
Convertible subordinated debt .................. 49,421 49,421
Long-term debt, other .......................... 8,282 9,910
-------- --------
Total long-term debt ..................... 57,703 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 November 29,
1997 and 13,153,485 at March 1, 1997 ....... 1,318 1,315
Additional paid-in capital ................... 32,123 31,994
Retained earnings ............................ 17,342 16,258
-------- --------
Total shareholders' equity ............... 50,783 49,567
-------- --------
Total liabilities and shareholders' equity $236,082 $243,319
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30, NOVEMBER 29, NOVEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C>
Net sales ................. $199,571 $206,219 $613,020 $625,535
Cost of sales ............. 157,227 161,032 482,505 490,898
-------- -------- -------- --------
Gross margin .......... 42,344 45,187 130,515 134,637
Selling, administrative and
occupancy expenses ...... 40,017 42,695 122,713 126,942
-------- -------- -------- --------
Operating income .......... 2,327 2,492 7,802 7,695
Interest expense, net ..... 1,854 2,040 5,993 5,991
-------- -------- -------- --------
Income before provision for 473 452 1,809 1,704
income taxes
Provision for income taxes 190 181 724 682
-------- -------- -------- --------
Net income ................ $ 283 $ 271 $ 1,085 $ 1,022
======== ======== ======== ========
Net income per share ...... $.02 $.02 $.08 $.08
==== ==== ==== ====
Weighted average number of
common shares used in
computing net income per
share ................... 13,180 13,153 13,180 13,174
====== ====== ====== ======
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................ $ 1,085 $ 1,022
Adjustments to reconcile to cash
provided by operations:
Depreciation and amortization ........... 4,923 6,039
LIFO provision .......................... 2,613 2,535
Cash provided by (used for) current
assets and liabilities:
Accounts payable and accrued liabilities (1,061) (17,980)
Accounts receivable ..................... (1,964) (3,431)
Inventories at current cost ............. 2,767 10,402
Other ................................... 758 3,006
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Net cash provided by operating activities . 9,121 1,593
Investing activities:
Purchase of property and equipment, net ... (1,925) (3,990)
Payment for purchase of retail stores, net
of cash acquired ........................ -- (10,093)
------- --------
Net cash (used for) investing activities .. (1,925) (14,083)
Financing activities:
Net borrowings (repayments) under revolving
credit line ............................. (5,000) 15,700
Net repayments and other .................. (2,201) (3,101)
------- --------
Net cash provided by (used for) financing
activities .............................. (7,201) 12,599
------- --------
Increase (decrease) in cash and cash
equivalents ............................. (5) 109
Cash and cash equivalents, beginning of
period .................................. 779 767
------- --------
Cash and cash equivalents, end of period .... $ 774 $ 876
======= ========
</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 NINE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30, NOVEMBER 29, NOVEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales (in thousands) .. $199,571 $206,219 $613,020 $625,535
======== ======== ======== ========
Gross margin .............. 21.2% 21.9% 21.3% 21.5%
Selling, administrative and
occupancy expenses ........ 20.0% 20.7% 20.0% 20.3%
-------- -------- -------- --------
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 and a .8% decrease in comparable store sales.
The following table lists corporately-owned store openings and store closings
through the third quarter ended November 29, 1997 and the similar prior year
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30, NOVEMBER 29, NOVEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Number of stores at
beginning of period ...... 136 141 138 136
Stores opened or acquired .. 1 1 1 9
Stores closed or sold ...... 0 (2) (2) (5)
--- ---- ---- ----
Total stores at end of
period ................... 137 140 137 140
=== ==== ==== ====
</TABLE>
Gross margin as a percentage of sales decreased during the three-month and
nine-month periods ended November 29, 1997 over the comparable prior year
periods due to lower third-party pharmacy gross margins, promotional activity
and physical inventory adjustments, partially offset by vendor deal income and
improved category management.
Selling, administrative and occupancy expenses were lower in total and as a
percentage of sales for the three-month and nine-month periods ended November
29, 1997 over the comparable prior year periods as a result of initiatives to
reduce controllable operating costs, including lower depreciation resulting from
more focused capital expenditures, lower net advertising costs, and lower
overall payroll costs, partially offset by the impact on labor costs of changes
in the minimum wage.
7
<PAGE> 8
Inventory Valuation
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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 year.
The table below sets forth the LIFO charge for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30, NOVEMBER 29, NOVEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
LIFO charge (in thousands) ... $871 $845 $2,613 $2,535
==== ==== ====== ======
</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 November 29, 1997, the total credit facility under the Agreement
allowed for borrowings of up to $65,500,000, depending upon available
collateral. The credit facility consists of a $55,000,000 revolver which expires
on May 31, 2000, and term debt of $10,500,000 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.
The Company believes that internally generated funds and borrowings available
under its Agreement are sufficient to finance the Company's current operations.
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 underperforming stores and general economic conditions.
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 reports on Form 8-K were filed during the quarter ended November 29,
1997.
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 6, 1998 By /s/ David L. Kriegel
--------------------- ---------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date January 6, 1998 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 29, NOVEMBER 30, NOVEMBER 29, NOVEMBER 30,
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 13,153 13,180 13,174
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 13,153 13,180 13,174
======= ======= ======= =======
Net income ..................... $ 283 $ 271 $ 1,085 $ 1,022
======= ======= ======= =======
Net income per common and common
equivalent share ............... $.02 $.02 $.08 $.08
==== ==== ==== ====
Fully Diluted:
Weighted average number of
common shares outstanding ...... 13,180 13,153 13,180 13,174
Net effect of dilutive stock
options -- based on treasury
stock method using closing
market price ................... (a) (a) (a) (a)
------- ------- ------- -------
Fully diluted shares ........... 13,180 13,153 13,180 13,174
======= ======= ======= =======
Net income ..................... $ 283 $ 271 $ 1,085 $ 1,022
======= ======= ======= =======
Net income per common share
assuming full dilution ......... $.02 $.02 $.08 $.08
==== ==== ==== ====
</TABLE>
(a) Excluded as amounts are antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> NOV-29-1997
<EXCHANGE-RATE> 1
<CASH> 774
<SECURITIES> 0
<RECEIVABLES> 16,489
<ALLOWANCES> 0
<INVENTORY> 182,569
<CURRENT-ASSETS> 202,132
<PP&E> 68,947
<DEPRECIATION> 40,936
<TOTAL-ASSETS> 236,082
<CURRENT-LIABILITIES> 123,372
<BONDS> 49,421
0
0
<COMMON> 1,318
<OTHER-SE> 49,465
<TOTAL-LIABILITY-AND-EQUITY> 236,082
<SALES> 613,020
<TOTAL-REVENUES> 613,020
<CGS> 482,505
<TOTAL-COSTS> 605,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,993
<INCOME-PRETAX> 1,809
<INCOME-TAX> 724
<INCOME-CONTINUING> 1,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,085
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
