<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 28, 1999 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
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DRUG EMPORIUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 31-1064888
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
(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.
</TABLE>
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 28, 1999
- ----------------------------- ------------------------------
Common Stock, $ .10 par value 13,193,285 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 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
2
<PAGE> 3
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
August 28, 1999 February 27, 1999
--------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 722 $ 893
Accounts receivable ............................... 33,940 18,323
Inventories, net of LIFO reserve of $24.2 ......... 171,106 164,789
million and $22.8 million at August 28, 1999
and February 27, 1999, respectively
Other ............................................. 2,249 2,319
---------------- ----------------
Total current assets ...................... 208,017 186,324
Property and equipment, net ......................... 30,497 30,708
Goodwill ............................................ 9,744 10,237
Other assets ........................................ 4,783 3,420
---------------- ----------------
Total assets ............................. $ 253,041 $ 230,689
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line .......................... $ 55,506 $ 15,106
Accounts payable ............................... 69,739 80,393
Accrued liabilities ............................ 16,260 22,047
Deferred income ................................ 3,122 3,904
Current maturities of long-term debt .......... 242 242
---------------- ----------------
Total current liabilities ............... 144,869 121,692
Deferred rent ....................................... 3,682 3,850
Convertible subordinated debt ....................... 49,421 49,421
Long-term debt, other ............................... 384 504
---------------- ----------------
Total long-term debt ................... 49,805 49,925
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 13,193,285 at August 28, 1999
and 13,185,785 at February 27, 1999 ........... 1,320 1,319
Additional paid-in capital ........................ 32,199 32,155
Retained earnings ................................. 21,166 21,748
---------------- ----------------
Total shareholders' equity ............... 54,685 55,222
---------------- ----------------
Total liabilities and shareholders' equity $ 253,041 $ 230,689
================ ================
</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 28, August 29, August 28, August 29,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ....................... $ 223,146 $ 204,845 $ 449,358 $ 414,017
Cost of sales ................... 173,796 162,275 351,217 327,818
---------- ---------- ---------- ----------
Gross Margin ............... 49,350 42,570 98,141 86,199
Selling, administrative and
Occupancy expenses ............ 48,854 42,486 95,548 83,248
Special charges (credits) ....... 0 (6,760) 0 (6,760)
Interest expense, net ........... 1,838 1,361 3,562 2,927
---------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes ...................... (1,342) 5,483 (969) 6,784
Provision (benefit) for
income taxes ............... (536) 2,197 (387) 2,770
---------- ---------- ---------- ----------
Net income (loss) ............... ($ 806) $ 3,286 ($ 582) $ 4,014
========== ========== ========== ==========
Earnings (loss) per common share:
Basic ......................... ($ .06) $ .25 ($ .04) $ .30
========== ========== ========== ==========
Diluted ....................... ($ .06) $ .24 ($ .04) $ .30
========== ========== ========== ==========
Weighted average number of
Common shares outstanding:
Basic ......................... 13,193 13,180 13,191 13,180
========== ========== ========== ==========
Diluted ....................... 13,193 16,408 13,191 13,189
========== ========== ========== ==========
Supplementary information:
LIFO provision included
in cost of sales ........... $ 720 $ 650 $ 1,440 $ 1,300
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
August 28, 1999 August 29, 1998
----------------- ----------------
Operating activities:
<S> <C> <C>
Net income (loss) ................................................ ($ 582) $ 4,014
Adjustments to reconcile to cash provided by (used in) Operations:
Depreciation and amortization ................................ 4,802 4,861
LIFO provision ............................................... 1,440 1,300
Cash provided by (used for) current assets and liabilities:
Accounts payable and accrued liabilities ..................... (17,338) (1,243)
Accounts receivable .......................................... (15,617) 5,865
Inventories at current cost .................................. (7,757) 5,568
Other ........................................................ (1,947) (981)
---------------- ----------------
Net cash provided by (used in) operating activities ............... (36,999) 19,384
Investing activities:
Purchase of property and equipment, net ........................... (3,497) (2,254)
---------------- ----------------
Net cash used in investing activities ............................. (3,497) (2,254)
Financing activities:
Net borrowings (repayments) under revolving
credit line .................................................. 40,400 (15,400)
Net repayments on term debt and other ............................ (75) (1,719)
---------------- ----------------
Net cash provided by (used in) financing activities .............. 40,325 (17,119)
---------------- ----------------
Increase (decrease) in cash and cash
equivalents ...................................................... (171) 11
Cash and cash equivalents, beginning of period ...................... 893 783
---------------- ----------------
Cash and cash equivalents, end of period ............................ $ 722 $ 794
================ ================
</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.
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
per share.
<TABLE>
<CAPTION>
(Unaudited) (In thousands, except per share data)
Three Months Ended Six Months Ended
August 28, 1999 August 29, 1998 August 28, 1999 August 29, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) and numerator
for basic earnings per share -
income (loss) available to
common stockholders ............. ($ 806) $ 3,286 ($ 582) $ 4,014
Effect of dilutive securities:
7.75% convertible
debentures ...................... (A) 575 (A) (A)
---------------- ---------------- ---------------- ----------------
Numerator for diluted earnings
(loss) per share - income
(loss) available to common
stockholders after
assumed conversions ............ ($ 806) $ 3,861 ($ 582) $ 4,014
================ ================ ================ ================
Denominator:
Denominator for basic earnings
(loss) per share - Weighted-
average shares ...................... 13,193 13,180 13,191 13,180
Effect of dilutive securities:
Employee stock options .......... (B) 8 (B) 9
7.75% convertible
debentures ...................... (A) 3,220 (A) (A)
---------------- ---------------- ---------------- ----------------
Denominator for diluted earnings
(loss) per share - adjusted
weighted-average shares and
assumed conversions .............. 13,193 16,408 13,191 13,189
================ ================ ================ ================
Basic earnings (loss) per share ....... ($ .06) $ .25 ($ .04) $ .30
================ ================ ================ ================
Diluted earnings (loss) per share ..... ($ .06) $ .24 ($ .04) $ .30
================ ================ ================ ================
</TABLE>
(A) The effect of the 7.75% convertible debentures is antidilutive and thus
excluded in the calculation of diluted earnings per share.
(B) 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. In March 1997, the Company established an electronic commerce site on
the Internet with the URL DrugEmporium.com. This site served as the
foundation for the Company's current efforts to develop an online drug
store, which will also be known as DrugEmporium.com. This redesigned
site launched on August 30, 1999. The company has invested substantial
resources to revamp the business processes around the site, and this
effort is ongoing in nature. During the first and second quarters of
Fiscal 2000, the company made material financial commitments related to
its online drug store in the amount of $11.4 million. Included in this
commitment amount are obligations totaling approximately $9.7 million
for which the Company serves as guarantor. These commitments were for
the purpose of financing, advertising, leasing and purchasing the
resources necessary for the development and ongoing support of
DrugEmporium.com, and have payment terms ranging from 12 to 36 months.
The Company has incurred costs relating to DrugEmporium.com for
development, advertising, site hosting, fulfillment, and systems
maintenance during the second quarter which resulted in an expense of
approximately $1.4 million on the Company's consolidated statements of
operations.
5. During the prior year second quarter, 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 part of a special credit in
the Company's statements of operations. The remaining amounts of the
payment relate primarily to franchise fee receivables accrued in the
normal course of business and reimbursements for legal costs and
interest.
6. Also during the prior year quarter, the Company recorded special and
nonrecurring charges 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 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.
7. The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10Q and
consequently do not include all of 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 27, 1999
(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 28, 1999 August 29, 1998 August 28, 1999 August 29, 1998
---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales (in thousands) . $ 223,146 $ 204,845 $ 449,358 $ 414,017
================ ================ ================ ================
Gross margin .............. 22.1% 21.6%(1) 21.8% 21.2%(1)
Selling, administrative and
Occupancy expenses ... 21.9% 20.7% 21.3% 20.1%
---------------- ---------------- ---------------- ----------------
Operating income .......... .2% .9%(2) .6% 1.1%(2)
================ ================ ================ ================
</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.
Second quarter sales increased 8.9% to $223.1 million in the current
year from $204.8 million in the prior year period. This increase is the result
of the addition of twelve VIX Stores purchased in February 1999 as well as a
1.3% increase in same store sales.
During the quarter, the Company's gross margin improved as a percent of
sales over the prior year period. This increase resulted from a combination of
slightly higher non-pharmacy margins, stable pharmacy margins, higher vendor
rebate income and lower inventory shrink expense, partially offset by higher
coupon expense versus the prior year period. Gross margins for the remainder of
Fiscal 2000 are expected to remain at comparable levels.
Higher payroll, professional fees, depreciation/amortization expense,
and credit card fees combined with lower franchise fee revenue caused operating
income to decline in the quarter relative to the prior year. Payroll costs for
the quarter were higher resulting from increased payroll expense relating to the
Company's E-commerce effort as well as higher benefits costs, both of which were
expected. Higher professional fees were also the result of the Company's
E-commerce effort, while higher depreciation/amortization expense was the result
of goodwill related to the Vix acquisition and the Company's intensified store
remodeling program along with other technology development initiatives, most
notably the Company's point of sale upgrade project, wide area network
communications project and its Year 2000 compliance project. Credit card fees,
as expected, were higher for the quarter as a result of an interchange fee
increase by both Visa and MasterCard that was put through earlier this year.
Finally, franchise fee revenue was lower by .25% of sales as a result of the
reduction in the number of franchise stores, resulting from both the sale of the
Company's Seattle franchise in the second quarter of Fiscal 1999 and the closure
of four franchise stores during the first six months of Fiscal 2000. The Company
currently has a number of technology related initiatives underway to reduce
operating costs, including the implementation of its Wide Area Network
communications system, a program to reduce bad check losses, and an interactive
voice response system to more efficiently process prescription orders.
DrugEmporium.Com
- ----------------
In March 1997, the Company established an electronic commerce site on
the Internet with the URL DrugEmporium.com. This site served as the foundation
for the Company's current efforts to develop an online drug store, which will
also be known as DrugEmporium.com. This redesigned site launched on August 30,
1999. The Company has invested substantial resources to revamp the business
processes around the site, and this effort is ongoing in nature. During the
first and second quarters of Fiscal 2000 the Company made material financial
8
<PAGE> 9
commitments in the amount of $11.4 million related to its online drug store.
These commitments were for the purpose of financing, leasing and purchasing the
resources necessary for the development and ongoing support of DrugEmporium.com,
and have payment terms ranging from 12 to 36 months.
The Company has incurred costs relating to DrugEmporium.com for
development, advertising, site hosting, fulfillment, and systems maintenance
during the second quarter which resulted in an expense of approximately $1.4
million on the Company's consolidated statements of operations. Although the
Company expects to be able to fund these and future added costs through third
party equity investments in DrugEmporium.com, there is no guarantee that this
financing will be available. In the event financing is not secured, the Company
will be required to fund all operating expenses relating to DrugEmporium.com
from existing operations.
In addition to the $1.4 million of DrugEmporium.com operating
expenses funded by the Company year-to-date, the Company has also funded
approximately $1.8 million in capital expenditures for DrugEmporium.com and also
serves as the guarantor of certain obligations incurred by its online subsidiary
for approximately $9.7 million.
Store Growth and Remodels
- -------------------------
The following table lists openings for corporately owned stores and
store closings through the second quarter ended August 28, 1999 and the similar
prior year period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 28, 1999 August 29, 1998 August 28, 1999 August 29, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Number of stores at
Beginning of period ......... 140 134 141 135
Stores opened or acquired ....... 1 0 2 0
Stores closed or sold ........... (1) (1) (3) (2)
---------------- ---------------- ---------------- ----------------
Total stores at end of period ... 140 133 140 133
================ ================ ================ ================
</TABLE>
The Company has plans to open approximately five new stores in the next
twelve months and to continue its store growth after that time at a similar
pace. In addition, the Company continues to aggressively execute its ongoing
program to update and remodel its existing store base. To date, approximately
forty percent of the Company's stores have experienced a major or minor
remodeling since this program was started. During the second quarter, the
Company focused its remodeling efforts on the twelve VIX stores acquired in
February 1999.
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 inflation rate, which was one and
one-half percent in both Fiscal 1999 and Fiscal 2000. This estimated LIFO charge
is adjusted at each year-end based upon the actual weighted average inflation
rate during the year.
9
<PAGE> 10
Liquidity and Capital Resources
- -------------------------------
The Company has a bank credit agreement (the "Agreement") which governs
its borrowings under its bank credit facilities. As of August 28, 1999, the
Company's $100 million credit facility consisted of outstanding borrowings of
$55.5 million. Significant items impacting the outstanding borrowings from the
year-end level of $15.1 million include a scheduled $24 million vendor payment
made shortly after year-end and the termination of the pharmacy accounts
receivable pre-funding program with McKesson Pay Systems in June of this year
which resulted in an increase of approximately $15 million in accounts
receivable and a corresponding increase in the Company's revolving credit
facility for the six-month period.
EBITDA for the second quarter of fiscal 2000 was $3.6 million compared
to $2.5 million for last year's comparable quarter. Excluding e-commerce costs,
EBITDA was $5.0 million for the quarter. For the six-month period, EBITDA was
$8.8 million as compared to $7.9 million in the previous year. Excluding
e-commerce costs, EBITDA for fiscal 2000 was $10.2 million for the six-month
period. The Company believes that internally generated funds, borrowings
available under its Agreement, and the anticipated third party equity financing
for DrugEmporium.com 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. All IT-related
systems, which include the Company's accounting software, AS400 applications,
host merchandising systems, store point of sale systems, vendor EDI documents
and other applications are Year 2000 compliant. The Company has completed the
majority of its assessment of non-IT-related systems for Year 2000 compliance. A
limited number of non-IT-related systems are not Year 2000 compliant, and are
expected to be upgraded by the end of November 1999.
The Company has surveyed and is working with its outside suppliers and
software vendors related to Year 2000 compliance. The external software
companies that the Company utilizes for pharmacy, merchandising, store point of
sale, and accounting systems have provided the Company with a Year 2000
compliant version of their respective products. The Company's outside payroll
processor is currently working with the Company to insure that a Year 2000
compliant version of its software will be in place no later than November 30,
1999. The Company estimates that its Year 2000 effort is approximately 90
percent complete as of the end of August 1999. The Company's total estimate of
Year 2000 compliance costs is projected to be $1,400,000, with $1,250,000
estimated to be related to the purchase of hardware and software to be
capitalized and $225,000 related to costs which will be expensed as incurred.
The Company incurred the majority of its Year 2000 costs during Fiscal 1999. A
majority of the costs were 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 is currently developing a contingency plan in the event of
any systems not being Year 2000 compliant. 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 assurances regarding
these issues from some (but not all) of its vendors, there is no guarantee that
these third party systems will be compliant. Any such non-compliance could have
a material 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.
10
<PAGE> 11
Forward-Looking Statements
- --------------------------
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, except for historical information contained
herein, 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, possible further downward
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, the competitive environment of the
on-line drugstore industry, the ability of the company to secure and maintain
key contracts, relationships and financing related to its on-line store,
technical issues related to the development of the web site and general economic
conditions.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 5. Other Information
Drug Emporium, Inc. hereby reports information related to two
management changes with the appointment of Michael P. Leach to the
position of Chief Financial Officer of DrugEmporium.com and Terry L.
Moore as Chief Financial Officer of Drug Emporium, Inc. as reported in
the attached press release (Exhibit 99).
Item 6. Exhibits and Reports
10. Material Contracts
10.2 Amendment I to Loan and Security Agreement
BankBoston Retail Finance, Inc. and Drug Emporium, Inc.
10.3 Amendment II to Loan and Security Agreement
BankBoston Retail Finance, Inc. and Drug Emporium, Inc.
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: October 8, 1999 By /s/ David L. Kriegel
------------------------ -------------------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date: October 8, 1999 By /s/ Terry L. Moore
------------------------ -------------------------------------
Terry L. Moore
Chief Financial Officer and Treasurer
13
<PAGE> 1
Exhibit 10.2
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This First Amendment to Loan and Security Agreement (the "First
Amendment") is made as of this 5th day of May, 1999 by and between
BankBoston Retail Finance Inc. (in such capacity, herein the
"AGENT"), a Delaware corporation with offices at 40 Broad Street,
Boston, Massachusetts 02109, as agent for the ratable benefit of the
"LENDERS", who are party to the Agreement (defined below)
and
Drug Emporium, Inc. (hereinafter, the "BORROWER"), a Delaware
corporation with its principal executive offices at 155 Hidden Ravines
Drive, Powell, Ohio 43065
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.
W I T N E S S E T H:
WHEREAS, on October 28, 1998 the Agent, the Lenders and the Borrower
entered in a certain Loan and Security Agreement (the "Agreement"); and
WHEREAS, the Borrower, the Agent, and the Lender desire to amend
certain of the provisions of the Agreement;
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders and
the Borrower as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein and
not otherwise defined shall have the same meaning herein as in
the Agreement.
2. AMENDMENT TO SECTION 5-12. Section 5-12 of the Agreement is
hereby amended by deleting the first sentence thereof and
replacing it with the following:
5-12. The Borrower shall maintain a trailing/rolling
twelve (12) month Fixed Charge Ratio of not less than 1.15 to
1 (tested monthly). For the purposes of determining the Fixed
Charge Ratio for fiscal years 2000 and 2001, the sum of up to
$8,000,000.00 per year in Capital Expenditures shall be
excluded in the calculation. There will be no such exclusion
for the purposes of calculating the Fixed Charge Ratio in
connection with the Libor Margin Pricing Grid.
3. RATIFICATION OF LOAN DOCUMENTS. Except as provided herein,
all terms and conditions of the Agreement and of the other
Loan Documents remain in full force and effect. Furthermore,
except as provided herein, all warranties and representations
made in the Agreement and in the other Loan Documents remain
in full force and effect.
<PAGE> 2
4. CONDITIONS TO EFFECTIVENESS. This First Amendment shall not
be effective until each of the following conditions precedent
have been fulfilled to the satisfaction of the Agent and the
Lenders:
1. This First Amendment shall have been duly executed
and delivered by the respective parties hereto.
2. No Suspension Event shall have occurred and be
continuing.
3. The Borrower shall have provided such additional
instruments and documents to the Agent as the Agent
and the Agent's counsel may have reasonably
requested.
5. MISCELLANEOUS.
(a) This First Amendment may be executed in several
counterparts and by each party on a separate counterpart, each
of which when so executed and delivered shall be an original,
and all of which together shall constitute one instrument.
(c) This First Amendment expresses the entire
understanding of the parties with respect to the transactions
contemplated hereby. No prior negotiations or discussions
shall limit, modify, or otherwise affect the provisions
hereof.
(d) Any determination that any provision of this
First Amendment or any application hereof is invalid, illegal
or unenforceable in any respect and in any instance shall not
effect the validity, legality, or enforceability of such
provision in any other instance, or the validity, legality or
enforceability of any other provisions of this First
Amendment.
(e) The Borrower shall pay on demand all costs and
expenses of the Agent, including, without limitation,
reasonable attorneys' fees, in connection with the
preparation, negotiation, execution and delivery of this First
Amendment.
(f) The Borrower warrants and represents that the
Borrower has consulted with independent legal counsel of the
Borrower's selection in connection with this First Amendment
and is not relying on any representations or warranties of any
Lender or the Agent or their respective counsel in entering
into this First Amendment.
IN WITNESS WHEREOF, the parties have caused this First Amendment to
Loan and Security Agreement to be executed by their duly authorized officers as
a sealed instrument as of the date first above written.
DRUG EMPORIUM, INC.
("Borrower")
By: /s/MICHAEL P. LEACH
---------------------------
Name: MICHAEL P. LEACH
------------------------
Title: CHIEF FINANCIAL OFFICER
-----------------------
<PAGE> 3
BANKBOSTON RETAIL FINANCE INC.
("Agent")
By: /s/ James R. Dore
---------------------------
Name: James R. Dore
-------------------------
Title: Vice President
------------------------
The "LENDERS"
BANKBOSTON RETAIL FINANCE INC.
By /s/ James R. Dore
----------------------------
Print Name: James R. Dore
------------------------
Title: Vice President
------------------------
<PAGE> 4
GENERAL ELECTRIC CAPITAL
CORPORATION
By /s/ Michael J. Mckay
----------------------------------
Print Name: Michael J. Mckay
------------------------------
Title: Duly Authorized Signatory
------------------------------
NATIONAL CITY COMMERCIAL
FINANCE, INC.
By /s/ Stanley J. Gregorin, Jr.
----------------------------------
Print Name: Stanley J. Gregorin, Jr.
------------------------------
Title: Vice President
------------------------------
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By /s/ M. Martha Gaskin
----------------------------------
Print Name: M. Martha Gaskin
------------------------------
Title: Vice President
------------------------------
LASALLE BUSINESS CREDIT, INC.
By /s/ Ellen T. Cook
----------------------------------
Print Name: Ellen T. Cook
------------------------------
Title: Vice President
------------------------------
<PAGE> 1
Exhibit 10.3
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
This Second Amendment to Loan and Security Agreement (the "Second
Amendment") is made as of this ____ day of September, 1999 by and between
BankBoston Retail Finance Inc. (in such capacity, herein the
"AGENT"), a Delaware corporation with offices at 40 Broad Street,
Boston, Massachusetts 02109, as agent for the ratable benefit of the
"LENDERS", who are party to the Agreement (defined below)
and
Drug Emporium, Inc. (hereinafter, the "BORROWER"), a Delaware
corporation with its principal executive offices at 155 Hidden Ravines
Drive, Powell, Ohio 43065
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.
W I T N E S S E T H:
WHEREAS, on October 28, 1998 the Agent, the Lenders and the Borrower
entered in a certain Loan and Security Agreement, as amended by a First
Amendment to Loan and Security Agreement dated May 5, 1999 (the "Agreement");
and
WHEREAS, the Borrower, the Agent, and the Lender desire to amend
certain of the provisions of the Agreement;
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders and
the Borrower as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein and
not otherwise defined shall have the same meaning herein as in
the Agreement.
2. AMENDMENT TO SECTION 5-12. Section 5-12 of the Agreement is
hereby amended by deleting the first sentence thereof and
replacing it with the following:
5-12. The Borrower shall maintain a trailing/rolling
twelve (12) month Fixed Charge Ratio of not less than 1.15 to
1 (tested monthly). For the purposes of determining the Fixed
Charge Ratio for fiscal years 2000 and 2001, there shall be no
deduction for Capital Expenditures to the extent that Capital
Expenditures do not exceed $18,000,000; inclusive of any
amount paid or incurred by the Borrower as a loan, investment,
equity infusion, capital expenditure, expense or otherwise in
connection with the creation or continued operation of
Borrower's commerce business ("E-Commerce",
<PAGE> 2
which term includes DrugEmporium.com Inc. and the business to
be carried on by it), including without limitation, any amount
invested in, advanced to or paid or incurred by or on behalf
of E-Commerce, except to the extent that the aggregate amount
of all such amounts paid or incurred by the Borrower in such
fiscal years exceeds $15,000,000.00. Borrower shall cause the
net proceeds of any sales by E-Commerce of additional equity
in E-Commerce not proposed to be used in the business of
E-Commerce to be applied to repay outstanding loans from
Borrower to E-Commerce. There will be no such exclusion for
the purposes of calculating the Fixed Charge Ratio in
connection with the Libor Margin Pricing Grid.
3. WAIVER OF COMPLIANCE WITH SECTIONS 4-18, 4-19, 4-20 AND
4-23. The Lenders waive compliance by the Borrower with the
terms of Sections 4-18, 4-19, 4-20 and 4-23 of the Agreement
in connection with the creation of E-Commerce and the
investments in and/or loans to be made to E-Commerce up to a
maximum aggregate amount of $15,000,00.00. In no event shall
the creation of E-Commerce be deemed a Permitted Acquisition
under Section 4-18. The Borrower shall not be required to
pledge its stock or other investments in E-Commerce. Unless an
Event of Default is then occurring the Borrower shall not be
required to apply any proceeds of the sale of such stock,
which are payable to the Borrower, to the Liabilities.
4. TRANSFER OF ASSETS TO DRUGEMPORIUM.COM. On or before
September 30, 1999 the Borrower shall furnish to the Agent
with a schedule of assets to be transferred to
DrugEmporium.com. Any transfer of assets and release of the
security interest granted to the Lenders in such assets shall
be subject to the prior approval of the Agent. The Agent in
considering such consent may seek consent from the requisite
number of Lenders. After such approval any transfer of assets
shall be free and clear of any lien held by the Agent and the
Lenders. Any assets transferred as referenced on the above
schedule shall be considered capital expenditures for the
purposes of Section 5-12 of the Agreement. For purposes of
calculating compliance with the limitations of Section 5-12
the book value of assets transferred shall be used.
5. AMENDMENT FEE. The Borrower shall pay to the Agent, for the
account of the Lenders, an amendment fee in the amount of
one-half percent (.50%) based upon upon the investment of each
$1,000,000.00 increment in E-Commerce, to the extent such
investment is funded through borrowings under the Agreement.
6. RATIFICATION OF LOAN DOCUMENTS. Except as provided herein,
all terms and conditions of the Agreement and of the other
Loan Documents remain in full force and effect. Furthermore,
except as provided herein, all warranties and representations
made in the Agreement and in the other Loan Documents remain
in full force and effect.
<PAGE> 3
7. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall
not be effective until each of the following conditions
precedent have been fulfilled to the satisfaction of the Agent
and the Lenders:
1. This Second Amendment shall have been duly executed
and delivered by the respective parties hereto.
2. No Suspension Event shall have occurred and be
continuing.
3. The Borrower shall have provided such additional
instruments and documents to the Agent as the Agent
and the Agent's counsel may have reasonably
requested.
The Agent shall promptly notify the Borrowers when such
conditions are satisfied.
8. MISCELLANEOUS.
(a) This Second Amendment may be executed in several
counterparts and by each party on a separate counterpart, each
of which when so executed and delivered shall be an original,
and all of which together shall constitute one instrument.
(b) This Second Amendment expresses the entire
understanding of the parties with respect to the transactions
contemplated hereby. No prior negotiations or discussions
shall limit, modify, or otherwise affect the provisions
hereof.
(c) Any determination that any provision of
this Second Amendment or any application hereof is invalid,
illegal or unenforceable in any respect and in any instance
shall not effect the validity, legality, or enforceability of
such provision in any other instance, or the validity,
legality or enforceability of any other provisions of this
Second Amendment.
(d) The Borrower shall pay on demand all
costs and expenses of the Agent, including, without
limitation, reasonable attorneys' fees, in connection with the
preparation, negotiation, execution and delivery of this
Second Amendment.
(e) The Borrower warrants and represents
that the Borrower has consulted with independent legal counsel
of the Borrower's selection in connection with this Second
Amendment and is not relying on any representations or
warranties of any Lender or the Agent or their respective
counsel in entering into this Second Amendment.
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Second Amendment to
Loan and Security Agreement to be executed by their duly authorized officers as
a sealed instrument as of the date first above written.
DRUG EMPORIUM, INC.
("Borrower")
By: /s/ Michael P. Leach
------------------------------------
Name: MICHAEL P. LEACH
----------------------------------
Title: Chief Financial Officer
---------------------------------
BANKBOSTON RETAIL FINANCE INC.
("Agent")
By: /s/ James R. Dore
------------------------------------
Name: James R. Dore
----------------------------------
Title: Vice President
---------------------------------
The "LENDERS"
BANKBOSTON RETAIL FINANCE INC.
By /s/ James R. Dore
------------------------------
Print Name: James R. Dore
--------------------------
Title: Vice President
--------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By /s/ Michael J. Mckay
------------------------------
Print Name: Michael J. Mckay
--------------------------
Title: Duly Authorized Signatory
--------------------------
<PAGE> 5
NATIONAL CITY COMMERCIAL
FINANCE, INC.
By /s/ Robert D. Dracon, Jr.
---------------------------
Print Name: Robert D. Dracon, Jr.
------------------------
Title: Vice President
------------------------
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By /s/ M. Martha Gaskin
---------------------------
Print Name: M. Martha Gaskin
------------------------
Title: Vice President
------------------------
LASALLE BUSINESS CREDIT, INC.
By /s/ Ellen T. Cook
---------------------------
Print Name: Ellen T. Cook
------------------------
Title: Vice President
------------------------
<PAGE> 1
Exhibit 99
FOR: Drug Emporium Inc.
APPROVED BY: Terry L. Moore
Chief Financial Officer
(740) 548-7080 x2143
FOR IMMEDIATE RELEASE
CONTACT: Cheryl Schneider/Hulus Alpay
Press: Michael McMullan/David Nugent
Morgen-Walke Associates, Inc.
(212) 850-5600
NEW CFOS APPOINTED AT DRUG EMPORIUM & DRUGEMPORIUM.COM
- Michael P. Leach Appointed CFO of DrugEmporium.com -
- Terry L. Moore Appointed CFO of Drug Emporium Inc -
Powell, Ohio, October 8, 1999 -- Drug Emporium Inc. (NASD:DEMP) today
announced that Michael P. Leach, age 30, has been appointed to the newly created
position of Chief Financial Officer of its subsidiary, DrugEmporium.com. Mr.
Leach has been with Drug Emporium Inc. for over six years and previously was
Chief Financial Officer of Drug Emporium, Inc. Prior to his tenure at the
Company, he worked for the international accounting firm of Ernst & Young.
Terry L. Moore, age 50, will replace Mr. Leach as Chief Financial
Officer of Drug Emporium, Inc. Mr. Moore joined Drug Emporium Inc. as Controller
in March of this year. Prior to joining Drug Emporium Inc., Mr. Moore spent over
two years at Shoe Corporation of America where he served as Vice President,
Treasurer and Chief Financial Officer of this Columbus, Ohio based footwear
retailer with over 650 leased shoe departments nationwide. Prior to that, Mr.
Moore was President and Chief Executive Officer of Nationwise Automotive, Inc.,
a Columbus based auto parts retailer with over 300 store locations, primarily in
the mid-west and southeast portions of the United States. During his 19-year
tenure with Nationwise Automotive, he also served as Chief Financial Officer.
In their new positions, Mr. Leach and Mr. Moore will both be reporting
directly to David Kriegel, Chairman and Chief Executive Officer of Drug
Emporium, Inc.
- more -
<PAGE> 2
NEW CFOS APPOINTED PAGE: 2
David Kriegel commented, "Mike's appointment as CFO of DrugEmporium.com
re-affirms our commitment to this rapidly growing portion of our business, which
will continue to receive the necessary support from Drug Emporium Inc. to
continuously expand in the competitive marketplace. As Mike has been
instrumental in the ongoing operations of DrugEmporium.com, we feel it is a
natural progression following his in-depth and crucial involvement with the
successful re-launch of our on-line drugstore, that he continues his efforts
toward making DrugEmporium.com the premier health content-driven e-commerce
business in the world."
Mr. Kriegel continued, "Mike is joining forces with a dynamic team of
individuals who are at the forefront of their respective specialties and
dedicated to building upon the recent successes of our on-line store."
Mr. Kriegel concluded, "We are also pleased to be filling his position
with Terry, an equally talented individual who brings with him a wealth of
experience in brick-and-mortar operations. We look for Terry's immediate
effectiveness and anticipate a seamless transition in the position since he has
worked alongside Mike and the finance department as Controller for the last six
months."
Drug Emporium Inc., through its subsidiary DrugEmporium.com, owns and
operates a discount-priced e-commerce store, DrugEmporium.com. The on-line store
sells prescription drugs, non-prescription medications, nutrition, wellness,
cosmetics, and health and beauty aids on-line. DrugEmporium.com is headquartered
in historic German Village in Columbus, Ohio. Drug Emporium, Inc. owns and
operates 140 brick-and-mortar stores under the names Drug Emporium, F&M Super
Drug Stores and Vix Drug Stores. All brick-and-mortar stores operate
full-service pharmacies and specialize in discount-priced merchandise including
health and beauty aids, cosmetics and greeting cards. The company also
franchises an additional 43 stores.
Except for historical information contained herein, the statements in
this release related to Drug Emporium are forward-looking and made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve known and unknown risks and
uncertainties, which may cause the Company's actual results in future periods to
differ materially from forecasted or expected results. These risks include,
among other things, the competitive environment of the on-line drugstore
industry in general, the ability of the Company to secure and maintain key
contracts and relationships, technical issues related to the development of the
website, and economic conditions in general. These and other risks are more
fully described in the Company's filings with the Securities and Exchange
Commission.
- --------------------------------------------------------------------------------
PLEASE VISIT OUR ONLINE DRUGSTORE
AT
www.DrugEmporium.com
- --------------------------------------------------------------------------------
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<PERIOD-START> FEB-28-1999
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0
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