<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 27, 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
DRUG EMPORIUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1064888
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
----------
155 HIDDEN RAVINES DRIVE
POWELL, OHIO 43065
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(TITLE OF CLASS)
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 so such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At May 17, 1999 there were 13,191,285 shares of Drug Emporium common
stock outstanding. The aggregate market value of shares of common stock held by
non-affiliates of the Registrant as of May 17, 1999 was approximately
$114,605,884 based on a closing price of $8.688 per share on Nasdaq National
Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 6., 7. and 8., and Part IV, Item 14. incorporate by
reference portions of the Drug Emporium, Inc. Annual Report to Stockholders for
the year ended February 27, 1999. Part III, Items 10., 11., 12., and 13.
incorporate by reference portions of the Drug Emporium, Inc. Proxy Statement for
the 1999 Annual Meeting of Stockholders. With the exception of the information
specifically incorporated by reference, the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended February 27, 1999 is not deemed filed as part of
this report.
1
<PAGE> 2
ITEM 1. BUSINESS
INTRODUCTION
In 1977, the first Drug Emporium store was opened in Columbus, Ohio.
As of February 27, 1999, the Company operates 141 company-owned stores, known as
Drug Emporium, F&M Super Drug Stores and Vix Drug Stores. In addition to the
Company-owned stores, as of February 27, 1999, there are 52 franchise stores.
The accompanying financial statements include only amounts related to
company-owned stores. The stores specialize in discount-priced merchandise,
including health and beauty aids, vitamins, cosmetics, greeting cards and
pharmacy. Drug Emporium also operates DrugEmporium.com, an online drug store
selling competitively priced health and beauty aids, cosmetics, vitamins and
prescription drugs. DrugEmporium.com is an independent division of the Company
that operates with key organizational and customer links to Drug Emporium, Inc.
The Company's common stock trades on the Nasdaq National Market under
the symbol DEMP. As of February 27, 1999, there were 13,185,785 shares
outstanding. Drug Emporium's 7-3/4% convertible subordinated debentures, due
October 1, 2014, are traded on the Nasdaq National Market under the symbol
DEMPG.
STORE OPERATIONS
Company stores range in size from 18,000 to 49,000 square feet, with a
typical store having approximately 27,000 square feet, including retail selling
space and storage space in the rear of each store. Retail selling space on
average accounts for 80% of each store's total square footage.
Each store has a manager, one or two assistant managers, a head
pharmacist, and approximately 8 to 12 additional full-time employees and
approximately 24 part-time employees. The stores are grouped into six
operational regions, each overseen by a regional director or regional vice
president. The regional director or vice president's responsibilities include
visiting stores and assuring that Company standards for buying, merchandising,
customer service, store appearance and store procedures are maintained.
The Company's stores are located primarily in shopping centers on
major commercial thoroughfares. The capital expenditure required to fixture and
equip a new store averages $350,000. Pre-opening expenses, including salaries
and promotional expenses, average $75,000 per store, and each store requires
approximately $1,200,000 in initial inventory.
The typical trade area for a Drug Emporium store exceeds 200,000
people within a defined area, usually five miles. The customer profile is 80
percent middle-to-upper income women between the ages of 21 and 65 who shop on a
two-and-a-half week cycle.
Drug Emporium stores accommodate an average of 6,000 shoppers per week
and provide an environment for shoppers seeking a pleasant and social shopping
experience. Drug Emporium fills a unique tenant category in a shopping center's
merchandising mix and Drug Emporium stores are well received by both hard and
soft goods national retailers.
Most stores are open seven days a week for a total of 84 hours per
week. In addition, the Company operates a total of twenty-six 24-hour stores.
Each store has a similar layout, generally with the pharmacy located in the rear
of the store. Company stores accept payment in cash, check or credit card and
from third-party providers.
The table set forth below lists the 193 Company-owned and franchise
Drug Emporium stores by market as of February 27, 1999:
<TABLE>
<CAPTION>
COMPANY-OWNED:
--------------
<S> <C>
Philadelphia, PA . . . . . . . . . . . . . . . . . . 28
Columbus, Cincinnati and Dayton, OH . . . . . . . . 21
Los Angeles, San Francisco and San Diego CA . . . . 21
Atlanta and Augusta, GA . . . . . . . . . . . . . . 17
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Detroit, MI . . . . . . . . . . . . . . . . . . . . 15
Buffalo and Rochester, NY . . . . . . . . . . . . . 12
Baltimore, MD and Washington, DC . . . . . . . . . . 8
Milwaukee, WI . . . . . . . . . . . . . . . . . . . 6
Louisville, KY . . . . . . . . . . . . . . . . . . . 4
Minneapolis, MN . . . . . . . . . . . . . . . . . . 4
St. Louis, MO . . . . . . . . . . . . . . . . . . . 4
Oklahoma City, OK . . . . . . . . . . . . . . . . . 1
---
141
INDEPENDENT FRANCHISES:
-----------------------
Dallas, Ft. Worth, TX . . . . . . . . . . . . . . . 15
Lafayette, Shreveport, LA, and Amarillo, Abilene,
Denton, Longview, Lubbock, Tyler and Waco, TX,
Little Rock, AR, and Wichita, KS . . . . . . . . . 11
San Antonio, Austin, TX . . . . . . . . . . . . . . 5
Charlotte, Raleigh, Durham, Concord, NC . . . . . . 6
Barboursville, Charleston, WV . . . . . . . . . . . 4
Independence and Kansas City, MO and
Overland Park, KS . . . . . . . . . . . . . . . . 3
Virginia Beach, VA . . . . . . . . . . . . . . . . . 2
Greensboro, Winston-Salem, NC . . . . . . . . . . . 2
Victoria, Brownsville, TX . . . . . . . . . . . . . 2
Morris Plains, NJ . . . . . . . . . . . . . . . . . 1
Union City, NJ . . . . . . . . . . . . . . . . . . 1
--
52
</TABLE>
When selecting store location, the Company considers various
geographic and demographic factors, including population around the site, income
level within that area, proximity to major shopping centers, traffic count,
accessibility of site, proximity of competitors and available parking spaces.
Market research may be utilized through an outside market research firm which
identifies, among other things, trade area, trade area potential, demographic
factors, competitors and competitors' sales/strengths/weaknesses, and projects
three-year anticipated sales volumes. Company and, to a limited extent,
franchisee pharmacy matters are supervised by the Director of Pharmacy who
directs compliance with state and federal pharmacy regulations and training.
FRANCHISE OPERATIONS
Drug Emporium's franchise-store network consists of 52 stores. Drug
Emporium maintains a Franchise Advisory Board designed to provide a forum to
evaluate and discuss issues and concerns of the Company and its franchisees.
Under its franchise system, the Company permits franchisees to operate Drug
Emporium stores in a specific geographic area based on ADIs (areas of dominant
influence of television signals). Prospective franchisees generally must make a
minimum equity investment of $1,000,000 per store and establish an acceptable
line of credit in the amount of $500,000 per store. The Company advises
franchisees in site selection, store layout, and establishing purchasing and
advertising policies.
The Company selects its franchisees carefully and works closely with
them to increase the likelihood of success for each franchisee. Prospective
franchisees sign confidentiality agreements in addition to a non-compete clause
contained within the executed franchise agreement. Upon execution of a franchise
agreement, the franchisee must pay a nonrefundable $25,000 fee for the first
store and a $10,000 commitment fee for each additional store designated for that
market. The balance of the $25,000 store fee ($15,000) is payable upon the
opening of each subsequent designated store in the market.
The current franchise agreement provides for franchise royalties at a
minimum rate of $6,000 per store for the second year and $25,000 per year per
store for stores open three years or more against the following percentage
royalties: 1% on gross sales from $3.5 million to $6 million, 2% from $6 million
to $8 million, 3% from $8 million to $10 million, and 1.25% on gross sales over
$10 million.
In addition, each franchisee must also spend at least 1% of gross
sales for advertising. The current franchise agreement permits the Company to
require that .6% of the 1% advertising expenditure be contributed to a national
advertising program if such program is established by the Company.
3
<PAGE> 4
The Company may either open its own stores or allow other franchisees
to open stores in a franchisee's territory outside a defined area for each
existing store if the franchisee fails to comply with the development schedule
agreed upon by the Company and the franchisee.
Thirty-two franchise stores were sold or closed during Fiscal 1999.
ACQUISITION OF FRANCHISEES
The Company, from time to time, has acquired or sought to acquire
certain of its franchise operations. The Company's decision to pursue the
acquisition of a franchisee is based on the Company's evaluation of the growth
opportunities in a particular market, the impact the acquisition would have on
earnings per share and the quality of the franchisee's existing management.
Since 1983, the Company has acquired franchisees located in Los Angeles,
Washington, D.C., Atlanta, Cincinnati, Milwaukee, Minneapolis, St. Louis,
Charleston, S.C., Indianapolis, Orlando, Louisville, Oklahoma City, San Diego
and Baton Rouge. The Company plans to evaluate future opportunities to acquire
appropriate franchisees from time to time and may use cash or securities to pay
for such acquisitions.
MERCHANDISING AND MARKETING
The Company's merchandising goal is to provide customers with the
widest available selection of health and beauty aids, cosmetics, prescription
drugs and general merchandise at everyday low prices. The Company estimates that
approximately 62% of a typical store's sales mix is health and beauty aids and
general merchandise, 31% pharmacy items and 7% cosmetics.
The Company is continuing to aggressively oversee strategies designed
to lower the total cost of acquiring merchandise in order to continue to be
competitive with other national and regional chain discounters. The Company is
continuing to invest in and upgrade its electronic in-store scanning and
backdoor receiving systems.
During Fiscal 1999, the Company's primary pharmacy supplier and
general merchandise distributor, McKesson Drug, accounted for over 35% of the
Company's purchases. No other single vendor accounted for more than 10% of the
Company's purchases. While the Company purchases from over 7,000 vendors, a
majority of its business is conducted with approximately 500 vendors. The
Company believes it is a significant customer for most of these 500 vendors.
The Company advertises through the use of television, radio, newspaper
and direct mail. Most advertising in Fiscal 1999 was print-based, utilizing
newspaper tabloids running approximately twice per month. Point of sale
advertising is also used. The Company's strategy of clustering stores within ADI
markets is an important factor in maximizing the effectiveness of its
advertising expenditures. The Company works with an advertising agency that
coordinates advertising for the entire chain.
CUSTOMER SERVICE
The Company believes that its commitment to customer service is an
important ingredient of its success. The Company encourages its managers and
other employees to be responsible to customers. The stores are designed to make
products easily accessible. Store employees are trained to be friendly and
helpful to customers.
COMPETITION
The sale of deep discount health and beauty aids, cosmetics, vitamins
and prescription drugs is highly competitive. The Company believes that the
principal bases of competition in this market are price, product variety,
service, site location and customer recognition. The Company also believes that
there exist only a few similar companies, most of which are regional chains. The
Company's stores compete not only with those similar companies but with numerous
conventional drug stores with national or regional images, and also with
supermarkets, mass merchants and category-specific discount stores. Many of the
Company's supermarket, mass merchant and conventional drug store competitors
have more outlets and substantially greater financial resources than the Company
or have more convenient locations than Company stores. The Company believes that
its prices are
4
<PAGE> 5
competitive and that it offers greater product variety and better service than
its competitors. The Company also believes that the smaller size of its stores
compared to the major discount competitors provides a better shopping experience
and allows a better selection of sites in tight real estate markets that exist
in some major cities. The Company's ability to expand successfully into new
markets is especially sensitive to the competitive factors in those markets.
DrugEmporium.Com
In March 1997, the Company established an electronic commerce site on
the internet with the URL DrugEmporium.com. This experimental site served as the
foundation for the Company's current efforts to develop a superior online drug
store, which will also be known as DrugEmporium.com. The new site, which is in
development, will emphasize customer service, selection, price and convenience,
and is expected to be fully operational during Fiscal 2000. The Company has
established a separate subsidiary for its e-commerce drug store. In addition,
the Company is in the process of establishing a separate capital structure for
this online subsidiary in order to meet the significant capital requirements
necessary to effectively compete in the online market.
The Company has invested substantial resources to revamp the business
processes around the site and those efforts are ongoing in nature. In addition,
the Company has made material financial commitments related to its online drug
store which will begin to take effect during the Company's second fiscal
quarter. Although the Company expects to be able to fund the added costs through
third party equity investments in its on-line subsidiary, there is no guarantee
that this financing will be available. In the event financing is not available,
the Company will be required to fund its e-commerce sight development and other
related costs from its existing business. These start-up costs may negatively
impact the overall operating results of the Company over at least the next
several quarters.
5
<PAGE> 6
EMPLOYEES AND TRAINING
At February 27, 1999, the Company had a total of approximately 5,820
employees, both full-time and part-time, of which 164 were corporate staff
personnel. None of the employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Drug Emporium believes that the training of store employees is one of
the most important elements of its business. The Company conducts training
classes at its headquarters, and senior management works closely with regional
and district managers in this regard.
REGULATION
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions. A
portion of the Company's personnel are paid at rates related to the federal
minimum wage, and accordingly, further increases in the minimum wage increase
the Company's labor costs.
The prescription drug business is subject to the federal Food, Drug
and Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and
Labeling Act relating to the content and labeling of drug products, comparable
state statutes and state regulation regarding record keeping and licensing
matters. These regulatory functions contain civil and criminal penalties for
violations.
The sale of franchises by the Company is subject to regulation by the
Federal Trade Commission and various states in which it currently does business
or in which the Company may do business in the future. Such regulations
generally require the prior registration or an exemption from registration for
the sale of franchises and delivery to prospective franchisees of a franchise
disclosure document. No assurances can be given that any future changes in the
existing laws or the promulgation of new laws will not adversely affect the
Company.
SERVICE MARKS
The Company has obtained federal registrations for the service marks
DRUG EMPORIUM, DRUG EMPORIUM and design, the Drug Emporium logo and DRUG
EMPORIUM, INC. The marks DRUG EMPORIUM EXPRESS, SAVINGS SO BIG YOU NEED A
SHOPPING CART (re-filed), EMPORIUM GOLD, DRUG EMPORIUM CONSUMER DIRECT, DE
DIRECT (the words), DE DIRECT (STYLIZED) AND DE DIRECT (the design) are pending
marks.
The mark DRUG EMPORIUM and design has been registered in Arkansas,
Minnesota, Nebraska, Wisconsin, Texas, West Virginia, New York, Nevada,
Missouri, Kentucky, Indiana, California, Alabama, Kansas, New Jersey, South
Carolina and North Carolina. DRUG EMPORIUM has been registered in Ohio, Florida,
Wisconsin, Tennessee, New York and Maryland.
The mark DRUG EMPORIUM and design has been registered in Mexico,
Japan, France, Canada, Australia and the United Kingdom. SAVINGS SO BIG YOU NEED
A SHOPPING CART is registered in Canada and Mexico and the Drug Emporium Logo is
registered in Canada.
Federal registration of a mark does not create new substantive rights
to use the mark or to assert rights based on ownership, but it does provide
additional remedies for the protection of the mark.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Served as
Name: Age: Position: Officer Since:
- ----- ---- --------- --------------
<S> <C> <C> <C>
David L. Kriegel 53 Chairman of the Board, Chief Executive 1992
Officer, President and Director
A. Joel Arnold 63 Senior Vice President 1995
Thomas H. Ziemke 56 Senior Vice President 1998
Jane H. Lagusch 53 Vice President, Secretary 1990
Michael P. Leach 29 Chief Financial Officer, Treasurer 1998
</TABLE>
6
<PAGE> 7
(1) Officers serve until their successors are chosen and are qualified
subject to earlier removal by the board of directors, and subject to
rights, if any, under employment contracts.
DAVID L. KRIEGEL
- ----------------
Since December 1992, Mr. Kriegel has been the Chairman and Chief
Executive Officer of the Company and since June of 1994 has been Chairman, Chief
Executive Officer and President of the Company. Mr. Kriegel is Chairman and
Chief Executive Officer of Kriegel Holding Company, Inc., a privately-owned
corporation dealing with real estate and distribution. Prior to January 1993,
Mr. Kriegel was Vice President of Cardinal Health, a division of Cardinal
Distribution, Inc., a publicly-owned company. Mr. Kriegel is a Director of Tele
Spectrum Worldwide, Inc., a publicly held company; an Advisory Board Member of
Bank One, Ohio and a Trustee of Ohio Northern University.
A. JOEL ARNOLD
- --------------
Mr. Arnold was appointed to the office of Senior Vice President 1995.
He is responsible for store operations, merchandising, pharmacy and loss
control. He formerly held the position of Director of Merchandising and
Operations in which he served for two years. A registered pharmacist, Mr. Arnold
has 40 years' experience in the retail drug industry.
THOMAS H. ZIEMKE
- ----------------
In March of 1998, Mr. Ziemke was appointed to the office of Senior
Vice President with responsibility for marketing and purchasing. Mr. Ziemke has
been associated with Drug Emporium since 1984 when he became the operator of the
Los Angeles based Drug Emporium franchise. He became Vice President of Western
Operations when the Company purchased the franchise in 1987 and served in that
capacity until his promotion to Senior Vice President.
JANE H. LAGUSCH
- ---------------
Mrs. Lagusch has been associated with the Company in various
capacities since 1980 and has been an officer of the Company since 1986. She was
appointed to her current position, Vice President and Secretary of the Company,
in 1993. Mrs. Lagusch has responsibility for corporate administrative functions.
MICHAEL P. LEACH
- ----------------
Since March 1998, Mr. Leach has served as Chief Financial Officer. Mr.
Leach was previously Controller of the Company for approximately two years and
is a Certified Public Accountant. Previous to joining Drug Emporium, Mr. Leach
was employed by Ernst & Young LLP, the external auditors of the Company.
ITEM 2. PROPERTIES
- ------- ----------
Most of the Company's stores are occupied pursuant to long-term leases
that vary as to rental provisions, expiration dates, renewal options, rental
amounts and payment provisions. The Company does not deem any individual store's
lease to be significant in relation to its overall operations. For information
as to the amount of the Company's rental obligations for retail store leases,
see Note 4 of Notes to Consolidated Financial Statements.
The Company owns a 33,000 square foot executive office building and
the surrounding land for use as its principal office in Powell, Ohio. The
Company also owns a portion of the building and land at one of its Detroit area
store locations.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
Nortex Drug Distributors, Inc. v. Drug Emporium, Inc., Case No. C2-93-767, filed
August 6, 1993 in the United States District Court, Southern District of Ohio,
Eastern Division, was dismissed during Fiscal 1999, as a result of the parties
reaching a confidential settlement agreement.
7
<PAGE> 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market
under the symbol DEMP. The following table sets forth, for the quarterly periods
shown, the high and low sale price per share as reported on the Nasdaq National
Market:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
May 31, 1997 $5.500 $4.125
August 30, 1997 $5.313 $4.000
November 29, 1997 $4.750 $3.750
February 28, 1998 $5.375 $3.875
May 30, 1998 $4.563 $3.813
August 29, 1998 $4.813 $3.750
November 28, 1998 $4.688 $3.188
February 27, 1999 $8.688 $4.125
</TABLE>
The Company paid no dividends in Fiscal 1999 or 1998.
At April 26, 1999 the Company had approximately 4,200 beneficial
owners of its common stock.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The information required by this Item 6 is incorporated by reference
from page 6 of the Drug Emporium, Inc. Annual Report to Stockholders for the
year ended February 27, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
The information required by this Item 7 is incorporated by reference
from pages 7 through 10 of the Drug Emporium, Inc. Annual Report to Stockholders
for the year ended February 27, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The information required by this Item 8 is incorporated by reference
from pages 11 through 18 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended February 27, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Certain of the information required by this Item 10 is set forth under
Item 1. "Executive Officers of the Company."
*
8
<PAGE> 9
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
*
* Reference is made to information under the captions "Election of
Directors," "Executive Compensation," "Security Ownership of Certain
Beneficial Owners and Management," and "Compensation Committee
Interlocks and Insider Participation," in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held June 23,
1999. The Company will mail its definitive proxy statement to
stockholders on or about May 21, 1999.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following Consolidated Financial Statements of Drug Emporium, Inc.
are incorporated by reference in Item 8 from the pages set forth below
of the Drug Emporium, Inc. Annual Report to Stockholders for the year
ended February 27, 1999.
<TABLE>
<CAPTION>
Page Nos. of
Annual Report
-------------
<S> <C>
Consolidated Balance Sheets as of February 27, 1999
and February 28, 1998 11
Consolidated Statements of Operations for each of
the Three Fiscal Years in the Period Ended
February 27, 1999 12
Consolidated Statements of Shareholders' Equity for
each of the Three Fiscal Years in the Period Ended
February 27, 1999 12
Consolidated Statements of Cash Flows for each of
the Three Fiscal Years in the Period Ended
February 27, 1999 13
Notes to Consolidated Financial Statements 14-18
Report of Independent Auditors 19
</TABLE>
(2) Financial Statement Schedules
-----------------------------
Schedules for which provision is made in Regulation S-X are not
required under the instructions contained therein, are inapplicable,
or the information is included in the Notes to the Consolidated
Financial Statements.
(3) Exhibits List
-------------
(3) Articles of Incorporation and By-Laws
-------------------------------------
3.3 Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.3 to the
Company's S-1 Registration Statement No. 33-21755)
9
<PAGE> 10
(10) Material Contracts
------------------
10.1 Drug Emporium, Inc. 1983 Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.2 to
the Company's S-1 Registration Statement
Registration No. 33-21755) **
10.2 Drug Emporium, Inc. 1984 Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.3 to
the Company's S-1 Registration Statement
Registration No. 33-21755) **
10.3 Drug Emporium, Inc. 1987 Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.4 to
the Company's S-1 Registration Statement
Registration No. 33-21755) **
10.4 Drug Emporium, Inc. 1990 Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.41
to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1990) **
10.5 Drug Emporium, Inc. 1987 Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit
10.5 to the Company's S-1 Registration Statement
Registration No. 33-21755) **
10.7 Form of License and Franchise Agreement
(incorporated by reference to Exhibit 10.7 to the
Company's S-1 Registration Statement Registration
No. 33-21755)
10.8 Form of Option Agreement (incorporated by
reference to Exhibit 10.8 to the Company's S-1
Registration Statement Registration No. 33-21755)
10.10 Loan and Security Agreement dated as of October
28, 1998, between Drug Emporium, Inc. and
BankBoston Retail Finance, (incorporated by
reference to Exhibit 10.1 of the Company's Form
10-Q for the period ended November 28, 1998)
10.11 Employment contract dated March 11, 1993 between
David L. Kriegel and Drug Emporium, Inc.
(incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended
February 27, 1993) **
10.12 Drug Emporium, Inc. 1993 Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for
the fiscal year ended February 27, 1993) **
10.13 Drug Emporium, Inc. 1993 Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit
10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 27, 1993) **
10.15 Amendment dated December 2, 1997 to Employment
Agreement made March 11, 1993, by and between Drug
Emporium, Inc. and David L. Kriegel (incorporated
by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year
ended February 28, 1998) **
10.16 Form of Employment Security Agreements between
Drug Emporium, Inc. and each of A. Joel Arnold,
Jane H. Lagusch and Timothy S. McCord, dated
December 2, 1997 (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28,
1998) **
10.17 Form of Severance Compensation Agreement between
Drug Emporium, Inc. and each of Michael P. Leach
and Lee Pfrogner, dated November 17, 1997
(incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998) **
10
<PAGE> 11
10.18 Consulting Agreement dated December 2, 1997,
between David L. Kriegel and Drug Emporium,
Inc. (incorporated by reference to Exhibit 10.18
to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1998) **
(11) Statement re Computation of Per Share Earnings
----------------------------------------------
11.1 Computation of Per Share Earnings is readily
computable from information disclosed in the
financial statements and therefore is not included
as a separate exhibit.
*(13) Annual Report to Security Holders, Form 10Q or Quarterly
--------------------------------------------------------
Report to Security Holders
--------------------------
13.1 Annual Report to Stockholders for Fiscal Year
Ended February 27, 1999 (limited to those portions
incorporated herein).
*(21) Subsidiaries of Registrant
--------------------------
21.1 The Company has the following wholly-owned
subsidiaries:
<TABLE>
<CAPTION>
State of
Name Incorporation
------------------------------------------------------------------
<S> <C>
Drug Emporium Express, Inc. Delaware
D.E. Michigan Management Co. Delaware
Drug Emporium of Michigan, Inc. Delaware
Drug Emporium of Maryland, Inc. Delaware
Emporium Venture, Inc. Ohio
Houston Venture, Inc. Ohio
RJR Drug Distributors Inc. Delaware
DrugEmporium.com, Inc. Delaware
</TABLE>
*(23) Consent of Experts
------------------
23.1 Consent of Ernst & Young LLP
*(27) Financial Data Schedule
-----------------------
27.1 Financial Data Schedule of the Company
*Included with this Annual Report on Form 10-K
**Compensatory plans, contracts or agreements
(b) Reports on Form 8-10
--------------------
None.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: May 19, 1999 By: /s/ David L. Kriegel
- ------------------- ---------------------
David L. Kriegel
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date: May 19, 1999
- -------------------
/s/ Michael P. Leach /s/ David L. Kriegel
- ------------------------------------ ------------------------------------
Michael P. Leach David L. Kriegel
Chief Financial Officer Chief Executive Officer and Director
/s/ Walter E. Sinterman
------------------------------------
Walter E. Sinterman
Director
/s/ William Sweet, Jr.
------------------------------------
William Sweet, Jr.
Director
/s/ Wesley Wright
------------------------------------
Wesley Wright
Director
12
<PAGE> 1
[PHOTOGRAPH]
CONNECTING WITH OUR CUSTOMERS
THE 1999 DRUG EMPORIUM ANNUAL REPORT
<PAGE> 2
ABOUT THE COMPANY
Drug Emporium is a national chain of 141 Company-owned drug stores operating as
Drug Emporium, F&M Super Drug Stores and Vix Drug Stores. In addition to the
Company-owned stores, there are 52 franchised Drug Emporium store locations. The
combined revenues of the Company-owned and franchised stores is approximately
$1.2 billion. Net sales in the Company's financial statements reflect only
revenues from the Company-owned stores.
All stores operate full-service pharmacies and specialize in
discount-priced merchandise, including health and beauty aids, vitamins,
cosmetics and greeting cards. The typical store location is a large, 26,000
square foot site, offering a wide selection of brand name and quality private
label products.
Drug Emporium also operates DrugEmporium.com, an online drug store selling
competitively priced health and beauty aids, cosmetics, vitamins and
prescription drugs. DrugEmporium.com is an independent division of the Company
that operates with key organizational and customer links to Drug Emporium, Inc.
The Company was founded in 1977 and its stock was first publicly traded in 1988.
As of February 27, 1999, there were 13,185,785 shares of Common Stock
outstanding, which are traded on the Nasdaq National Market under the symbol
DEMP. The Company's 7-3/4 percent Convertible Subordinated Debentures due
October 1, 2014 are traded on Nasdaq under the symbol DEMPG.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FEBRUARY 27, 1999 FEBRUARY 28, 1998
(Dollars in thousands, except per share data) (52 weeks) (52 weeks)
================================================================================================
<S> <C> <C>
FOR THE YEAR ENDED:
Net sales $ 839,443 $ 836,405
- -----------------------------------------------------------------------------------------------
Operating income before special charges* $ 5,285 $ 8,705
- -----------------------------------------------------------------------------------------------
Net income $ 3,799 $ 1,691
- -----------------------------------------------------------------------------------------------
Average sales per store (52-week weighted average) $ 6,312 $ 6,105
- -----------------------------------------------------------------------------------------------
AT YEAR END:
Inventories at current cost $ 187,575 $ 189,043
- -----------------------------------------------------------------------------------------------
LIFO reserve (22,786) (21,751)
- -----------------------------------------------------------------------------------------------
Inventories $ 164,789 $ 167,292
- -----------------------------------------------------------------------------------------------
Working capital $ 64,632 $ 79,113
- -----------------------------------------------------------------------------------------------
Shareholders' equity $ 55,222 $ 51,390
- -----------------------------------------------------------------------------------------------
Current ratio 1.53 1.73
- -----------------------------------------------------------------------------------------------
Long-term debt to equity .90 1.09
- -----------------------------------------------------------------------------------------------
Shares outstanding (in thousands) 13,186 13,180
- -----------------------------------------------------------------------------------------------
STORES OPEN:
Company-owned 141 135
- -----------------------------------------------------------------------------------------------
Franchised and licensed 52 84
- -----------------------------------------------------------------------------------------------
Total 193 219
- -----------------------------------------------------------------------------------------------
PER SHARE (BASIC AND DILUTED):
Earnings $ 0.29 $ 0.13
- -----------------------------------------------------------------------------------------------
Shareholders' equity $ 4.19 $ 3.90
===============================================================================================
</TABLE>
* Net one-time gains of $(6,760,000) and $(2,092,000) were recorded in fiscal
years 1999 and 1998, respectively.
<PAGE> 3
WE DELIVER VALUE TO OUR CUSTOMERS,
BY UNDERSTANDING WHO THEY ARE,
ANTICIPATING THEIR NEEDS AND
RESPONDING TO THEIR CHANGING LIFESTYLES.
TO OUR SHAREHOLDERS
"Connecting With Our Customers" is not only the theme of our annual report this
year, but an integral part of our long-term growth strategy. In order to best
serve our shareholders and grow our Company, we have committed ourselves to
providing the best prices, product selection and service to our customers and
strengthening and expanding our customer base in creative and long-lasting ways.
Our connection with our customers takes place not only when we serve customers,
but also when we order merchandise, stock our shelves, and plan store layouts.
In short, connecting with our customers is a part of everything we do.
Our dedication to our customers manifested itself in many ways in fiscal
1999. From remodeling older Drug Emporium sites and beginning the expansion of
the "Do-It-Yourself Health" section of our stores to laying the groundwork for
such in-store conveniences as paycheck cashing, ATM services and postage stamp
sales, we took many steps to broaden the products and services we offer. We
introduced the CyberZone in some of our stores, enabling customers to access
health information from the Internet. In addition, our improved operating
efficiencies have enabled our pharmacists to increase their focus on customer
care. Accordingly, pharmacy sales accounted for the largest percentage of our
revenue increase for fiscal 1999.
The time that we have spent rebuilding the foundation of Drug Emporium and
repositioning the Company to achieve and sustain a higher level of financial
success has been a critical investment not only in our future, but also in our
ability to build shareholder value. It is something that we never lose sight of,
and we have been working diligently to realize the potential of this Company on
behalf of our shareholders. In fiscal 1999, we strengthened our balance sheet,
made substantial progress with our Internet initiative and expanded our regional
presence with the strategic acquisition of Vix Drug Stores. We also made
substantial investments in technology, with the implementation of new
point-of-sale and pharmacy systems.
FINANCIAL PERFORMANCE FOR FISCAL 1999 AND BEYOND
We are only just beginning to realize the financial benefits of many of the
improvements we have made in the last few years. For fiscal 1999, our financial
results, which showed modest improvements, illustrate a company approaching the
end of a successful turnaround. Net sales for fiscal 1999 were $839.4 million,
compared with $836.4 million for the prior fiscal year. Vix Drug Stores,
acquired during the fourth quarter of fiscal 1999, contributed $5.9 million to
the Company's net sales. The increase also reflects a 1.3% rise in same store
sales and the closing of 6 underperforming stores. Fiscal 1999 net income
climbed 124% to $3.8 million, or $0.29 per basic and diluted share, from $1.7
million, or $0.13 per basic and diluted share, for fiscal 1998. Before a $14.4
million special credit for the sale of Western Drug Distributors, a former
[PHOTOGRAPH]
David L. Kriegel,
Chairman, Chief Executive Officer
and President
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 1
<PAGE> 4
DELIVERING OUR CUSTOMERS A WIDE
RANGE OF PRODUCTS AT A LOW PRICE
[PHOTOGRAPH]
CAPTION FOR PHOTOGRAPH--
(When we launched our Web site in March 1997, we were the first drug store on
the Internet. As electronic commerce grows, we are positioning ourselves to be
the leader in on-line drugstore sales. We are implementing the best available
technology to redesign our Web site. When complete, www.DrugEmporium.com will
offer cost-conscious consumers a more extensive array of products, more
efficient fulfillment and greater ease of use. Today, the site still offers a
number of unique advantages. DrugEmporium.com is backed by a solid
brick-and-mortar operation, licensed to fill prescriptions in all 50 states.)
Drug Emporium franchisee, fiscal 1999 net income was $763,000, or $0.06 per
basic and diluted share.
Our pharmacy, which accounted for about 31% of sales in fiscal 1999,
benefited from both pricing and the continuing product mix shift towards higher
cost prescriptions. As a result, we reported an increase of 8.2% in comparable
pharmacy sales. Moreover, pharmacy margins, which were 21.4% for the year, seem
to have stabilized following years of constant cost-containment pressures from
managed care. Improved generic substitution rates should fuel further pharmacy
margin improvement in fiscal 2000.
The non-pharmacy segment of our business, which accounted for about 69% of
sales in fiscal 1999, exhibited some softness last year and generated negative
comparable sales of approximately (1%), due to market saturation in specific
regions, especially Atlanta. However, our initiative to increase the front-end
shelf space allocated to vitamins, nutrition and herbal remedies and the
expansion of our food offerings have resulted in more significant sales
contributions from those departments. We anticipate further growth for these
areas in fiscal 2000, as well as higher cosmetics sales stemming from recently
completed resets of the category and the introduction of new business lines by
Johnson & Johnson and Procter & Gamble.
In fiscal 2000, the Company will be introducing such products and services
as postage stamps, money orders, utility bill paying, ATMs and paycheck cashing.
By offering these conveniences at our successfully converted Vix locations and
all of our Drug Emporium stores, we expect to improve customer traffic and boost
front-end sales. These products and services are expected to be available in all
of our markets by the end of this fiscal year. In addition to our efforts to
increase front-end sales, we also have taken a number of steps to improve
margins for our front-end operations. We are refining our product mix to
increase the emphasis on higher-margin categories and product lines,
implementing a new shrink-reduction program, and continuing to utilize our
Mission Critical inventory management program.
IMPROVING OUR POSITIONING FOR GROWTH
In fiscal 1999, Drug Emporium took a major step toward securing its future
growth by structuring a new revolving credit facility for $100 million, about
$85 million of which was available at year end. This credit
2 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 5
INCREASING SHAREHOLDER
VALUE FOR OUR INVESTORS
[PHOTOGRAPH]
CAPTION FOR PHOTOGRAPH--
(Pictured here is the Herb and Nutritional Center in one of our newly acquired
Vix stores. Vitamins and herbs have become an excellent source of high-margin,
front-end sales growth as the popularity of "Do-it-Yourself" healthcare has
escalated. Relying heavily on the successful Vix model, we will be expanding the
herb and vitamin sections in all Drug Emporium and F&M stores.)
facility offers us a more favorable rate, increased flexibility and greater
access to capital for both strategic acquisitions and day-to-day operations.
The Company's balance sheet improved in other ways as well. We reduced our
total debt by $16.5 million from year-end fiscal 1998 to the end of fiscal 1999,
and, as a result, lowered our total interest expense significantly, by $2.2
million, or 28%, to $5.5 million. On the operating side, our inventory-reduction
program, Mission Critical, has enabled us to improve inventory turns and cut
approximately $40 million from comparable store inventory over the past two
years. We expect further reductions in comparable store inventory and increases
in cash flow as we continue to use this successful program to trim greater
quantities of secondary product lines.
Our employees were instrumental to our growth in fiscal 1999. Regardless of
the size or complexity of the problems we encountered, they were always there
willing to contribute both the support and hard work needed to push our Company
forward. We feel that it would be mutually beneficial for them to have the
opportunity to participate as owners, not only to better align their interests
with those of our shareholders, but also to reward them personally for the
growth of our Company. Therefore, the Board of Directors has requested
shareholder approval of the 1999 Stock Option Plan.
VIX DRUG STORES ACQUISITION
During the first quarter of fiscal 2000, we completed the acquisition of
Vix Drug Stores, a 12-store, deep- discount New York chain in Buffalo and
Rochester-two new markets for Drug Emporium. This acquisition represents the
continuation of our strategic plan to geographically concentrate our store base.
Not only are the Vix stores extremely compatible with our existing store base,
but they also incorporate some interesting ideas to drive customer count. We
will be applying some of these strategies to our other stores throughout fiscal
2000, as well as adding value to the acquisition by broadening the product mix
at the Vix chain. In addition, we believe we can learn from the strong
store-within-a-store herbal business that Vix has developed. We expect the Vix
stores to contribute about $92 million in sales for fiscal 2000.
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 3
<PAGE> 6
DEVELOPING, CHALLENGING
AND INVESTING IN OUR PEOPLE
[PHOTOGRAPH]
CAPTION FOR PHOTOGRAPH--
(Our employees are dedicated to providing friendly, high-quality service. They
understand that the customers who rely on them to fill their prescriptions are
real people with real concerns. They are committed to addressing those concerns,
answering their questions and giving them the information they need to feel
completely comfortable with the medications we supply.)
MOVING FORWARD WITH AMERICA'S FIRST ON-LINE DRUG STORE
On a cold winter day in March 1997, Millie Baker of Tequesta, FL., became the
first customer of the Internet's first drug store, www.DrugEmporium.com. At that
time, we were uncertain what to expect in terms of order volume and customer
interest. The Internet has grown exponentially since then, more people have
become comfortable making on-line purchases, and several other pharmacy sites
have popped up. In response, we have been honing our strategy to maximize the
success of our e-commerce initiatives.
We have many advantages over our on-line competitors. We were the first
drug store on the Internet, and unlike most other on-line drug stores, we are
backed by a brick-and-mortar operation with long-standing supplier
relationships, and licenses to fill prescriptions in all 50 states. We are
committed to maintaining the integrity of our site by keeping our drug
fulfillment independent of our pharmaceutical advertisers, thereby retaining the
trust of our customers by protecting their utmost privacy. Both of these ethical
obligations, we believe, will boost the popularity of our Web site as acceptance
for this channel grows.
Currently, we are preparing to introduce our next-generation Web site,
www.DrugEmporium.com, which is being designed to exceed customers' expectations
in terms of convenience, product selection, price and ease of use. To ensure
that the site operates reliably, we have selected the best available technology.
The project is running on schedule and should be completed by the end of the
summer. To expand our on-line client base, we are evaluating a number of
marketing options, which we will begin to implement as we move closer to
completing the site improvements.
CHANGES TO OUR BOARD OF DIRECTORS
Our Board has undergone significant change in this past year. The accidental
death of one director and retirement of two others was a sad loss for the
Company.
V.J. "Tom" Wiechart, Sr., R.Ph., a director since 1993, passed away in
August 1998. A registered pharmacist and owner of several drug stores, Mr.
Wiechart provided unique insights into dealing with managed
4 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 7
SUPPORTING OUR CUSTOMERS
LIFESTYLE AND NEEDS
[PHOTOGRAPH]
CAPTION FOR PHOTOGRAPH--
(In line with our commitment to keep our customers informed, we have begun
featuring a "CyberZone" in a number of our stores in fiscal 1999. The CyberZone
provides customers with limited Internet access, directly linking them to
health-related Web sites. Of course, they are also free to check out our very
own www.DrugEmporium.com Web site where they can learn more about the Company
and experience our on-line drug store first-hand. The information available on
the sites ranges from fitness and nutritional guidelines to disease management.)
care issues and valuable business advice. He also served as both a friend to and
advocate of our pharmacists. His presence will be greatly missed.
Macy T. Block retired from our Board at the end of January. Upon his
retirement, Mr. Block commended us on turning around Drug Emporium toward
profitability. We thank him for his years of service to the Company as well as
his kind words.
Robert S. Meeder served on our Board for 11 years. His contributions to the
Company were numerous during such critical periods as our public stock offering
and later, our reorganization. Mr. Meeder retired from the Board at the end of
fiscal 1999 to devote more time to other business interests.
We were pleased to add Donald B. Hayes, Sr., John J. Havlicek and Robert W.
McCurdy, R.Ph. to our Board of Directors this year. They bring expertise in the
areas of banking, franchising and pharmacy.
We look forward to reporting our progress to shareholders and the financial
community as we secure Drug Emporium's place in the new millennium. With solid
management, dedicated employees and carefully planned strategies, we believe
that our Company is well-positioned to grow stronger in fiscal 2000 and beyond.
To all of our shareholders, employees and customers, thank you for making it
possible for us to continue to reach higher.
/s/ David L. Kriegel
David L. Kriegel
Chairman, Chief Executive Officer and President
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 5
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data is derived from the
consolidated financial statements of the Company. The financial data should be
read in conjunction with the consolidated financial statements and related notes
contained elsewhere in this report and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------------------------------
February 27, February 28, March 1, March 2, February 25,
1999 1998 1997 1996 1995
(in thousands, except per share data) (52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 839,443 $ 836,405 $ 855,016 $ 738,772 $ 729,503
- --------------------------------------------------------------------------------------------------------------------
Gross margin 176,729 178,289 185,475 160,146 153,696
- --------------------------------------------------------------------------------------------------------------------
Selling, administrative and occupancy expenses 171,444 169,584 172,560 146,774 143,337
- --------------------------------------------------------------------------------------------------------------------
Operating income before special charges (credits) 5,285 8,705 12,915 13,372 10,359
- --------------------------------------------------------------------------------------------------------------------
Special (credits) charges (6,760) (2,092) 2,800 3,000 11,850
- --------------------------------------------------------------------------------------------------------------------
Interest, net 5,487 7,653 7,882 6,468 6,697
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 6,558 3,144 2,233 3,904 (8,188)
- --------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 2,759 1,453 1,081 1,562 (2,797)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,799 $ 1,691 $ 1,152 $ 2,342 $ (5,391)
======================================================================================================================
PER SHARE DATA:
Earnings (loss) (1) $ 0.29 $ 0.13 $ 0.09 $ 0.18 $ (0.41)
- --------------------------------------------------------------------------------------------------------------------
Cash dividends -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 4.19 $ 3.90 $ 3.77 $ 3.68 $ 3.50
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 64,632 $ 79,113 $ 76,302 $ 80,195 $ 83,664
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 230,689 $ 219,784 $ 243,319 $ 243,898 $ 176,444
- --------------------------------------------------------------------------------------------------------------------
Non-current liabilities $ 53,775 $ 60,330 $ 63,523 $ 67,391 $ 67,738
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 55,222 $ 51,390 $ 49,567 $ 48,545 $ 46,149
=====================================================================================================================
</TABLE>
(1) Represents basic and diluted per share amounts as defined by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS No. 128).
Earnings (loss) per share amounts prior to 1998 have been restated as required
to comply with FAS No. 128.
6 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 9
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 years
indicated.
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------
February 27, February 28, March 1,
1999 1998 1997
(52 weeks) (52 weeks) (52 weeks)
==================================================================
<S> <C> <C> <C>
Net sales (in thousands) $839,443 $836,405 $855,016
- -----------------------------------------------------------------
Gross margin 21.0% 21.3% 21.7%
- -----------------------------------------------------------------
Selling, administrative and
occupancy expense 20.4% 20.3% 20.2%
- ------------------------------------------------------------------
Operating income 0.6% 1.0% 1.5%
==================================================================
</TABLE>
SALES
Total sales for Fiscal 1999 increased by .4 percent over the prior year. This
increase was the result of additional sales from the Vix acquisition, a
comparable store sales increase of 1.3 percent, and a reduction in sales as a
result of the lower average store count. Average sales per store for Fiscal 1999
based on a weighted average number of stores were up 3.4 percent over Fiscal
1998 due to the comparable store sales increase as well as the closure of six
under-performing stores.
Total sales for Fiscal 1998 decreased 2.2 percent from Fiscal 1997, while
comparable store sales for the period decreased .6 percent. The total sales
decrease was due to a lower store count in Fiscal 1998 versus Fiscal 1997, as
well as the comparable store sales decrease. Average sales per store for Fiscal
1998 based on a weighted average number of stores were down .7 percent versus
Fiscal 1997, primarily due to the comparable store sales decrease.
Pharmacy sales as a percentage of total sales were 31 percent, 29 percent,
and 27 percent of sales in Fiscal 1999, 1998, and 1997, respectively. Management
expects that pharmacy sales will continue to increase as a percentage of total
sales in the coming year.
The following table lists stores opened or acquired and stores closed for
the years indicated:
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------
February 27, February 28, March 1,
1999 1998 1997
(52 weeks) (52 weeks) (52 weeks)
=================================================================
<S> <C> <C> <C>
Number of stores at
beginning of year 135 138 136
- -----------------------------------------------------------------
Stores opened or acquired 12 1 9
- -----------------------------------------------------------------
Stores closed (6) (4) (7)
- -----------------------------------------------------------------
Total stores at end of year 141 135 138
=================================================================
</TABLE>
GROSS MARGIN
Fiscal 1999 gross margins were lower than the prior year due to lower pharmacy
gross margins as well as an expected drop in vendor rebate income, partially
offset by higher non-pharmacy margins that resulted from improved category
management. The company does not anticipate further declines in gross margins in
Fiscal 2000.
In the 2nd Quarter of Fiscal 1999, the Company recorded a $1.7 million one
time inventory write down due to store closure-related inventory liquidations
and other inventory write-downs. The non-recurring inventory-related costs of
this special charge were recorded as a component of gross margins in accordance
with Emerging Issues Task Force (EITF) Issue No. 96-9. Excluding the impact of
this write-down, total gross margins as a percentage of sales for Fiscal 1999
were 21.3 percent.
Fiscal 1998 gross margins were lower than Fiscal 1997 due to increased
inventory shrinkage and lower pharmacy margins, partially offset by the benefits
of improved category management on non-pharmacy margins.
SELLING, ADMINISTRATIVE AND OCCUPANCY
Net advertising costs for Fiscal 1999 were slightly lower in both dollars and as
a percentage of sales versus the prior year. In addition, gross advertising
costs (expenditures before vendor cooperative funding) were .2 percent of sales
lower than the prior year. The Company anticipates net advertising costs for the
coming fiscal year to be consistent with Fiscal 1999.
Payroll costs excluding taxes, benefits and other payroll related expenses
for Fiscal 1999 were lower in both dollars and as a percentage of sales versus
the prior year as a result of the Company's ongoing initiative to reduce
administrative costs. Occupancy costs for Fiscal 1999 were lower in both dollars
and as a percentage of sales versus the prior year due to fewer stores and
higher per store sales.
Other operating expenses were higher in Fiscal 1999 versus the prior year
in both dollars and as a percentage of sales, primarily due to higher
depreciation expense. In addition, franchise fees, which are netted against
other operating expenses, were lower in Fiscal 1999 due to the termination of
the Western Drug Distributors, Inc. franchise agreement. The Western Drug buyout
lowered franchise fees for Fiscal 1999 by .2 percent of sales versus the prior
year and is projected to lower franchise fees an additional .2 percent in Fiscal
2000.
Franchise fees were $3,435,000, $4,794,000 and $4,840,000 in Fiscal 1999,
1998 and 1997 respectively. The reduction in franchise fees in Fiscal 1999 was
the result of an agreement with Western Drug Distributors, Inc., the Drug
Emporium franchise store operator in the Seattle and Portland area, to terminate
Western's franchise agreement.
Selling, administrative and occupancy expenses as a percentage of net sales
increased in Fiscal 1998 compared to Fiscal 1997.
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The increase in Fiscal 1998 over Fiscal 1997 is a result of higher occupancy
costs and other operating expenses offset by lower advertising and payroll
costs.
SPECIAL CHARGES (CREDITS)
The impact of special charges (credits) on net income and descriptions of the
components of the charges are shown below:
<TABLE>
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------
February 27, February 28, March 1,
1999 1998 1997
(in thousands, except per share data) (52 weeks) (52 weeks) ( 52 weeks)
==============================================================================
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME
TO NET INCOME BEFORE
SPECIAL CHARGES (CREDITS):
Net income $3,799 $ 1,691 $1,152
- ------------------------------------------------------------------------------
Special charges (credits),
net of income taxes (3,036) (1,255) 1,680
- ------------------------------------------------------------------------------
Net income before
special charges (credits) $ 763 $ 436 $2,832
- ------------------------------------------------------------------------------
Earnings per share before
special charges (credits)
(basic and diluted) $ 0.06 $ 0.03 $ 0.22
- ------------------------------------------------------------------------------
</TABLE>
One Time Gain Related to the Sale of
Western Drug Distributors
During Fiscal 1999 the Company entered into an agreement with Western Drug
Distributors, Inc., its franchise store operator in the Seattle and Portland
area, to terminate Western Drug's franchise agreement. The termination was
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.
Store Closure Expense
Store closing reserves are established based on management's expectation of the
costs which will be incurred over the remaining lease terms of the closed
locations, net of expected sublease income. In Fiscal 1997, the Company recorded
costs associated with stores closed during Fiscal 1997 and earlier of $1.3
million, which was recorded as a part of special charges. In Fiscal 1998,
additional store closing charges were offset by the receipt of $1.6 million
related to a favorable lease buyout.
During Fiscal 1999, as a result of an ongoing review of its business
operations, 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
margins in the Fiscal 1999 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 margins in accordance with Emerging Issues Task Force (EITF) Issue No.
96 - 9.
Management's goal is to sublease or through other means remove all
significant closed-store obligations. Since March 1994, the Company has closed
51 stores, of which non-subleased obligations continue at February 27, 1999 on
eight stores. Management continues to seek ways to relieve obligations on these
stores.
Impairment of Long-Lived Assets
In Fiscal 1997, the Company adopted SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long-Lived Assets to Be Disposed Of. Accordingly,
the Company evaluated the ongoing value of its long-lived assets. Based on this
evaluation, the Company determined that leasehold improvements and lease assets
for certain stores were impaired and recorded, as a part of special charges, the
transitional amortization charge of $1.5 million. A $300,000 charge was recorded
in Fiscal 1998 and is shown as occupancy expense in the consolidated statement
of operations. No charge was recorded during Fiscal 1999.
Settlement of Litigation and Recovery of Legal Costs
Subsequent to the end of Fiscal 1998, the Company reached a confidential
settlement agreement with one of its franchisees to resolve a longstanding
lawsuit. The impact of the settlement and associated legal costs is reflected in
the Fiscal 1998 results, net of a third-party recovery. The Company also
recorded a recovery of related prior period legal costs as a special credit in
Fiscal 1998.
INTEREST, NET
Net interest expense decreased significantly in Fiscal 1999 due to a lower
average balance on the Company's revolving credit facility versus the prior
year. The lower average revolver balance was primarily a result of the pay down
of the revolver with the $15.4 million in proceeds that resulted from the
termination of the company's franchise agreement with Western Drug Distributors,
Inc. and inventory reductions.
Net interest for Fiscal 1998 showed a slight decrease versus Fiscal 1997 as
the result of approximately $20 million in inventory reductions that took place
during the year that were related to the Company's "Mission Critical"
initiative.
8 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ACQUISITIONS
On February 5, 1999 the Company completed its purchase of substantially all of
the assets of the Vix drug store chain, which operates twelve deep discount drug
stores in the Buffalo and Rochester, New York areas. Both areas represent new
markets for the Company. The acquired stores were operated under the Vix name by
Tops, a division of Ahold International. The Company paid $31.2 million in cash
for the assets of the business and assumed all store real estate leases. No
other liabilities were assumed. The acquisition was financed through the use of
the Company's bank facility and is expected to be accretive to earnings during
Fiscal 2000. Fiscal 2000 sales are expected to increase by $92 million as a
result of the acquisition. The acquisition was accounted for as a purchase. The
Fiscal 1999 consolidated statement of operations reflect the results of
operations of the acquired stores from the date acquired.
INVENTORY VALUATION
The Company uses the LIFO method of accounting for its inventories. Under this
method, the cost of merchandise sold reported in the financial statements
approximates current cost. The Company uses an estimated percentage rate of
inflation determined at the beginning of the fiscal year in computing its LIFO
charges throughout the fiscal year. This LIFO charge is adjusted at each
year-end based upon the actual weighted average percentage rate of inflation.
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------
February 27, February 28, March 1,
1999 1998 1997
================================================================
<S> <C> <C> <C>
LIFO provision (benefit)
(in thousands) $1,035 $709 $(112)
- ----------------------------------------------------------------
Inflation (deflation) rate .8% .4% (-.1)%
================================================================
</TABLE>
Inventory turnover was approximately four turns for Fiscal 1999 versus three
turns for the prior fiscal year. During Fiscal 1999, the company continued to
realize the benefits of the "Mission Critical" inventory reduction initiative
that was implemented on a company wide basis in Fiscal 1998. This initiative has
resulted in a reduction in the average per store inventory level to $1.3 million
in Fiscal 1999 from $1.4 million in Fiscal 1998. Due primarily to this drop, the
Company was able to lower its inventory levels, adjusted for the Vix
acquisition, by $19.6 million dollars. As a result of its ongoing inventory
management efforts, the Company expects this trend of lower per-store inventory
levels and the resulting positive effect on inventory turnover and liquidity to
continue in Fiscal 2000, although at a slower rate.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1999, the Company terminated its existing banking relationship and
entered into a new agreement with BankBoston (the "Agreement"). The Agreement
allows for revolving borrowings of up to $100 million, depending upon available
collateral, and expires on October 31, 2003. The Agreement provides for an
advance rate against both inventory and accounts receivable collateral, and
provides for a more favorable LIBOR-based borrowing interest rate. At the
company's current level of working capital, the asset collateral borrowing base
exceeds the $100 million credit facility limit.
The Company's borrowing rate can fluctuate between the bank's prime rate
and a LIBOR-based rate, depending on the ability of the Company to meet certain
financial performance measures. The Agreement requires a commitment fee on the
revolver of .25 percent on the unused available credit and has no compensating
balance requirements. Borrowings made pursuant to the Agreement are secured by
substantially all assets of the Company. The repurchase of the Company's
convertible subordinated debentures and stock and the payment of dividends are
permitted, although some restrictions apply.
As of February 27, 1999, the Company's credit facility consisted of
outstanding borrowings of $15.1 million, leaving $84.9 million available and
unused as of that date. During Fiscal 1999, the Company generated $53.5 million
in cash flow from operations versus $26.0 million in the prior year. The
majority of this cash flow was the result of the $15.4 million one-time lump sum
payment related to the termination of the Western Drug Distributors, Inc.
franchise agreement, a temporary increase in accounts payable and accrued
liabilities of $23.8 million and a permanent reduction in inventory of $19.6
million. The Company anticipates further reductions in its per store inventory
levels during Fiscal 2000, and thus its borrowing needs, due to its ongoing
efforts to better manage its procurement and distribution processes. The company
invested $5.7 million of cash flow from operations in capital expenditures,
while another $31.2 million was used to fund the Vix acquisition. In addition,
the Company used $16.4 million of cash flow from operations to pay down debt.
The Company's Fiscal 1999 balance sheet reflects net working capital of
$64.6 million versus net working capital of $79.1 million at the end of the
prior year. The decrease in net working capital is the result of a net increase
in the Company's contingency reserve for store closings in the amount of $4.8
million, a net $6.6 million impact of the Vix transaction on working capital,
and the pay off of approximately $7.5 million in long term debt carried by the
Company's former bank at the time the Company changed its revolving credit
facility.
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cash paid for interest on the revolving credit line and long-term debt was
approximately $150,000 lower than the interest expense reported in the Company's
Fiscal 1999 financial statements. In Fiscal 1998, cash paid for interest on the
revolving credit line and long-term debt was approximately equal to that
reported on the Company's financial statements, while in Fiscal 1997, cash
interest paid was approximately $1 million more than reported. The Company
believes that internally generated funds and borrowings available under its
Agreement are sufficient to finance the Company's current operations.
CLOSURE OF "BIG D" STORES
The Company closed its single remaining "Big D" store in March, 1998. Pretax
losses from the "Big D" operation in the amount of $.4 million and $1.2 million
are included in the Fiscal 1999 and Fiscal 1998 results, respectively.
IMPACT OF 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's accounting software and AS400 applications are Year 2000 compliant.
The Company is finalizing implementation of Year 2000 solutions in its pharmacy,
payroll, host merchandising systems, store register systems, vendor EDI
documents and other applications. These applications are expected to be
compliant by May 1999. 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 June 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 register
and accounting systems have provided the company with a Year 2000 compliant
version of their respective products.
The Company estimates that its Year 2000 effort is approximately 85 percent
complete as of the end of February 1999 and will be substantially completed as
of May 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 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 incurred the majority of
its Year 2000 costs during Fiscal 1999. Most 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.
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 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 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 and general economic conditions.
10 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands)
- -----------------------------------------------------------------------------------------------------
ASSETS February 27, 1999 February 28, 1998
======================================================================================================
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 893 $ 783
- -----------------------------------------------------------------------------------------------------
Accounts receivable 18,323 17,410
- -----------------------------------------------------------------------------------------------------
Inventories 164,789 167,292
- -----------------------------------------------------------------------------------------------------
Income taxes and other current assets 2,319 1,692
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 186,324 187,177
- -----------------------------------------------------------------------------------------------------
Property and equipment, net 30,708 26,777
- -----------------------------------------------------------------------------------------------------
Goodwill 10,237 4,215
- -----------------------------------------------------------------------------------------------------
Other assets 3,420 1,615
- -----------------------------------------------------------------------------------------------------
Total assets $230,689 $219,784
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands)
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY February 27, 1999 February 28, 1998
=====================================================================================================
<S> <C> <C>
CURRENT LIABILITIES:
Revolving credit line $ 15,106 $ 22,200
- -----------------------------------------------------------------------------------------------------
Accounts payable 80,393 64,025
- -----------------------------------------------------------------------------------------------------
Accrued liabilities 22,047 14,785
- -----------------------------------------------------------------------------------------------------
Deferred income 3,904 3,679
- -----------------------------------------------------------------------------------------------------
Current maturities of long-term debt 242 3,375
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 121,692 108,064
- -----------------------------------------------------------------------------------------------------
Deferred rent 3,850 4,164
- -----------------------------------------------------------------------------------------------------
Convertible subordinated debt 49,421 49,421
- -----------------------------------------------------------------------------------------------------
Long-term debt, other 504 6,745
- -----------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 49,925 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 13,186,000 in 1999; 13,180,000 in 1998 1,319 1,318
- -----------------------------------------------------------------------------------------------------
Additional paid-in capital 32,155 32,123
- -----------------------------------------------------------------------------------------------------
Retained earnings 21,748 17,949
- -----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 55,222 51,390
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $230,689 $219,784
=====================================================================================================
</TABLE>
See accompanying notes
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 11
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
- -------------------------------------------------------------------------------------------------------
February 27, 1999 February 28, 1998 March 1, 1997
(in thousands, except per share amounts) (52 weeks) (52 weeks) (52 weeks)
========================================================================================================
<S> <C> <C> <C>
Net sales $ 839,443 $ 836,405 $ 855,016
- -------------------------------------------------------------------------------------------------------
Cost of sales 662,714 658,116 669,541
- -------------------------------------------------------------------------------------------------------
Gross margin 176,729 178,289 185,475
- -------------------------------------------------------------------------------------------------------
Selling, administrative and occupancy expenses 171,444 169,584 172,560
- -------------------------------------------------------------------------------------------------------
Special charges (credits) (6,760) (2,092) 2,800
- -------------------------------------------------------------------------------------------------------
Interest expense, net 5,487 7,653 7,882
- -------------------------------------------------------------------------------------------------------
Income before provision for income taxes 6,558 3,144 2,233
- -------------------------------------------------------------------------------------------------------
Provision for income taxes 2,759 1,453 1,081
- -------------------------------------------------------------------------------------------------------
Net income $ 3,799 $ 1,691 $ 1,152
- -------------------------------------------------------------------------------------------------------
Earnings per share (basic and diluted) $ 0.29 $ 0.13 $ 0.09
- -------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN
COMPUTING EARNINGS PER SHARE:
Basic 13,180 13,180 13,169
- -------------------------------------------------------------------------------------------------------
Diluted 13,214 13,197 13,182
=======================================================================================================
</TABLE>
See accompanying notes
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Common Common Additional Total
Stock Stock Paid-In Retained Shareholders'
(in thousands) Shares Amount Capital Earnings Equity
=================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 2, 1996 13,184 $1,318 $32,121 $ 15,106 $48,545
- ------------------------------------------------------------------------------------------------
Retirement of treasury shares (31) (3) (127) -- (130)
- ------------------------------------------------------------------------------------------------
Net income -- -- -- 1,152 1,152
- ------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1997 13,153 $ 1,315 $ 31,994 $ 16,258 $ 49,567
- ------------------------------------------------------------------------------------------------
Exercise of stock options 27 3 129 -- 132
- ------------------------------------------------------------------------------------------------
Net income -- -- -- 1,691 1,691
- ------------------------------------------------------------------------------------------------
Balance at February 28, 1998 13,180 $ 1,318 $ 32,123 $ 17,949 $ 51,390
- ------------------------------------------------------------------------------------------------
Exercise of stock options 6 1 32 -- 33
- ------------------------------------------------------------------------------------------------
Net income -- -- -- 3,799 3,799
- ------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 27, 1999 13,186 $ 1,319 $ 32,155 $ 21,748 $ 55,222
=================================================================================================
</TABLE>
See accompanying notes
12 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
February 27, 1999 February 28, 1998 March 1, 1997
(in thousands) (52 weeks) (52 weeks) (52 weeks)
===========================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,799 $ 1,691 $ 1,152
- ---------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE TO CASH PROVIDED BY OPERATIONS:
Depreciation and amortization 8,798(2) 7,345 8,788(1)
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 24 610 500
- ---------------------------------------------------------------------------------------------------------------------------
LIFO provision (benefit) 1,035 709 (112)
- ---------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) CURRENT ASSETS AND LIABILITIES:
Accounts payable and accrued liabilities 23,843 (2,725) (18,626)
- ---------------------------------------------------------------------------------------------------------------------------
Accounts receivable (913) (2,885) (1,507)
- ---------------------------------------------------------------------------------------------------------------------------
Inventories at current cost 19,637 19,948 7,921
- ---------------------------------------------------------------------------------------------------------------------------
Other (2,766) 1,268 2,439
===========================================================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIES 53,457 25,961 555
===========================================================================================================================
INVESTING ACTIVITIES
Purchase of property and equipment, net (5,737) (2,949) (5,809)
- ---------------------------------------------------------------------------------------------------------------------------
Payment for purchase of retail stores, net of cash acquired (31,175) - (10,093)
===========================================================================================================================
NET CASH USED FOR INVESTING ACTIVITIES (36,912) (2,949) (15,902)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit line (7,094) (19,400) 20,100
- ---------------------------------------------------------------------------------------------------------------------------
Proceeds from term debt - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net repayments on term debt and other (9,341) (3,608) (4,741)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (16,435) (23,008) 15,359
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 110 4 12
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 783 779 767
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 893 $ 783 $ 779
===========================================================================================================================
</TABLE>
See accompanying notes.
(1) Includes $1,500,000 related to the Company's adoption of FAS 121.
(2) Includes $1,300,000 related to noncash store closure charge to write down
store equipment, fixtures and leasehold improvements.
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 13
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Drug Emporium,
Inc. and subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations
The Company is primarily in the business of operating and franchising retail
stores specializing in the sale of health and beauty care products,
over-the-counter medication, prescription drugs, greeting cards, cosmetics and
highly-consumable products primarily in an everyday-low-price format. During
Fiscal 1999, the stores operated under the names of Drug Emporium, F&M Super
Drug Stores, and Vix Deep Discount. As of year-end, approximately eighty percent
of the Company-owned stores were located in the states of California, Georgia,
Michigan, New Jersey, New York, Ohio and Pennsylvania.
Fiscal Year
The fiscal year of the Company is the 52-53 week period ending on the Saturday
closest to the end of February. The quarter and fiscal year ends for 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
Fiscal year 1999 Fiscal year 1998
=================================================================
<S> <C> <C>
First quarter May 30, 1998 May 31, 1997
- -----------------------------------------------------------------
Second quarter August 29, 1998 August 30, 1997
- ----------------------------------------------------------------
Third quarter November 28, 1998 November 29, 1997
- ----------------------------------------------------------------
Year end February 27, 1999 February 28, 1998
=================================================================
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand and deposits at financial institutions with maturities of less than three
months.
Accounts Receivable
The Company uses the allowance method of accounting for uncollectible accounts.
Accounts receivable are stated net of allowances for uncollectible accounts of
$1,051,000 and $1,155,000 as of February 27, 1999 and February 28, 1998,
respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by use
of the last-in, first-out (LIFO) method. If current cost had been used,
inventories would have been approximately $22,786,000 and $21,751,000 higher
than reported at February 27, 1999 and February 28, 1998, respectively. Cost of
sales is primarily computed on an estimated basis and adjusted based on physical
inventory counts which are generally taken at all locations twice annually.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of owned assets. Leasehold
improvements are amortized over the estimated useful life of the asset or the
term of the lease, whichever is shorter.
Pre-Opening Expenses
Expenditures related to the opening of new stores, other than expenditures for
capital assets, are charged against earnings when incurred.
Goodwill
Goodwill is amortized over 15 years using the straight-line method. The Company
amortized $580,000, $548,000, and $548,000 of goodwill during Fiscal 1999, 1998
and 1997, respectively. Accumulated amortization was $4,901,000 at February 27,
1999 and $4,321,000 at February 28, 1998. The Company reviews its goodwill for
impairment annually, based upon expectations of nondiscounted cash flows and
operating income. As of February 27, 1999, management believes that none of its
goodwill is impaired.
Debt Issuance Costs
Debt issuance costs incurred in connection with the convertible subordinated
debt are amortized using a straight-line method over the term of the debt.
Amortization expense related to the issuance costs is reported as interest
expense and approximated $55,000 in 1999, $55,000 in 1998, and $55,000 in 1997.
The amount of accumulated amortization, at February 27, 1999 and February 28,
1998, was $519,000 and $464,000, respectively.
Advertising Costs
The Company records expense for the production costs of radio and television
advertising in the year incurred. Gross advertising costs, before vendor
reimbursements, as a percentage of net sales, were 2.4 percent, 2.6 percent, and
2.1 percent in Fiscal 1999, 1998 and 1997, respectively.
14 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Franchise Arrangements
Arrangements with franchisees and licensees who operate throughout the United
States generally provide for initial fees, new store opening fees and continuing
payments to the Company based upon a percentage of sales. The fees, when earned,
and related costs are recorded net and included as a reduction to the Company's
selling, administrative and occupancy expenses. Net franchise fees were
$3,435,000, $4,794,000 and $4,840,000 in Fiscal 1999, 1998 and 1997,
respectively.
Vendor Contract Income Recognition
From time to time the Company enters into contracts with various suppliers for
the purchase of merchandise for sale. These contracts may provide for
contractual payments from vendors in exchange for product conversion, product
placement, coverage of operational costs, purchase commitments, or similar
inducements. The Company records vendor contract payments as a reduction of cost
of sales over the life of the contract in the case of payments made with
recourse, or when receivable in the case of non-recourse payments.
Store Closure Expense
The store closing reserve has been established based on management's expectation
of the costs which will be incurred over the remaining lease terms of the closed
locations, net of expected sublease income. In Fiscal 1997, the Company incurred
costs associated with stores closed during Fiscal 1997 and earlier of $1.3
million, which was recorded as a part of special charges. In Fiscal 1998,
additional store closing charges were offset by the receipt of $1.6 million
related to a favorable lease buyout. During Fiscal 1999, as a result of an
ongoing review of its business operations, 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 margins in the Fiscal 1999 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 margins in accordance with Emerging Issues Task Force
(EITF) Issue No. 96 - 9.
Impairment of Long-Lived Assets
In Fiscal 1997, the Company adopted SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long-Lived Assets to Be Disposed Of. Accordingly,
the Company evaluated the ongoing value of its long-lived assets. Based on this
evaluation, the Company determined that leasehold improvements and leased assets
for certain stores were impaired and recorded, as a part of special charges, the
transitional amortization charge of $1,500,000. A $300,000 charge was recorded
in Fiscal 1998 and is shown as occupancy expense in the consolidated statement
of operations. No charge was recorded during Fiscal 1999.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform to the Fiscal 1999 presentation.
NOTE 2 - REVOLVING CREDIT LINE
During Fiscal 1999, the Company terminated its existing banking relationship and
entered into a new agreement with BankBoston (the "Agreement"). The Agreement
allows for revolving borrowings of up to $100 million, depending upon available
collateral, and expires on October 31, 2003. The Agreement provides for an
advance rate against both inventory and accounts receivable collateral. At the
company's current level of working capital, the asset collateral borrowing base
exceeds the $100 million credit facility limit. As of February 27, 1999, the
Company's credit facility consisted of outstanding borrowings of $15.1 million,
leaving $84.9 million available and unused as of that date.
The Company's borrowing rate can fluctuate between the bank's prime rate
and a LIBOR-based rate, depending on the ability of the Company to meet certain
financial performance measures. At February 27, 1999, the weighted average
borrowing rate was 6.97 percent. The Agreement requires a commitment fee on the
revolver of .25 percent on the unused available credit and has no compensating
balance requirements. Borrowings made pursuant to the Agreement are secured by
substantially all assets of the Company. The repurchase of the Company's
convertible subordinated debentures and stock and the payment of dividends are
permitted, although some restrictions apply.
NOTE 3 - LONG-TERM DEBT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in thousands) February 27, 1999 February 28, 1998 March 1, 1997
======================================================================
<S> <C> <C> <C>
Convertible subordinated
debentures $49,421 $49,421 $49,421
- ----------------------------------------------------------------------
Term debt - 9,000 12,000
- ----------------------------------------------------------------------
Other 746 1,120 1,860
- ----------------------------------------------------------------------
50,167 59,541 63,281
- ----------------------------------------------------------------------
Less current maturities (242) (3,375) (3,950)
- ----------------------------------------------------------------------
$49,925 $56,166 $59,331
======================================================================
</TABLE>
The Company has $49,421,000 of 7.75 percent convertible subordinated debentures
outstanding. These debentures are unsecured obligations of the Company and may
be converted into common stock of the Company at any time prior to maturity,
unless previously redeemed. The conversion rate is 65.1466 shares per $1,000
principal amount of debentures (or approximately $15.35 per share),
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
subject to certain adjustments under the terms of these debentures. These
debentures are redeemable at the option of the Company at 100.7 percent of par
plus accrued interest. This redemption rate will decline by .7 percent, to par
on October 1, 1999. The debentures are subject to a sinking fund, commencing
October 1, 2000, calculated to retire at least 70 percent of the debentures
prior to the final maturity date of October 1, 2014. The Company has reserved
3,387,624 shares of common stock for issuance upon conversion of the debentures.
During Fiscal 1999, the convertible debentures traded in a range of 76.75
percent to 89.5 percent of par, with a year-end price of 81.08 percent of par.
The Company has a note bearing variable interest at 7.79 percent on
February 27, 1999. Principal amounts related to the notes due for fiscal years
2000 through 2004 are $242,000, $260,000, $232,000, $7,000 and $5,000,
respectively.
NOTE 4 - OPERATING LEASES
The Company leases retail stores and certain equipment under non-cancelable
operating leases which expire at various dates. Certain of the store leases
require contingent rentals based upon sales in excess of specified amounts and
generally require the Company to pay utilities, common area maintenance,
insurance and taxes. Certain leases are renewable with escalation clauses. Rent
expense (excluding rent expense for closed stores from the date closed) was
$33,052,000, $33,732,000, and $32,854,000 during Fiscal 1999, 1998 and 1997,
respectively.
At February 27, 1999, future minimum operating lease payments during the
next five years and thereafter are: 2000 - $31,116,000; 2001 - $28,769,000; 2002
- - $24,174,000; 2003 - $20,587,000; 2004 - $16,296,000; and $34,510,000
thereafter. At February 27, 1999, the future minimum lease payments for closed
stores total approximately $10,954,000 for which there are subleases in force
aggregating $4,118,000.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(in thousands) February 27, 1999 February 28, 1998 March 1, 1997
=====================================================================================
<S> <C> <C> <C>
Land and building $ 3,331 $ 3,331 $ 3,475
- ------------------------------------------------------------------------------------
Furniture and fixtures 44,817 40,188 38,941
- ------------------------------------------------------------------------------------
Acquired leases and leasehold
improvements 31,311 26,449 26,502
- ------------------------------------------------------------------------------------
79,459 69,968 68,918
- ------------------------------------------------------------------------------------
Less allowances for
depreciation and amortization (48,751) (43,191) (38,506)
- ------------------------------------------------------------------------------------
$ 30,708 $ 26,777 $ 30,412
====================================================================================
</TABLE>
NOTE 6 - INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The tax amounts recorded in the consolidated balance sheets consisted of
the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
TAX AFFECTED AMOUNTS
- ----------------------------------------------------------------------------------
(in thousands) February 27, 1999 February 28, 1998
==================================================================================
<S> <C> <C>
Deferred tax assets (liabilities):
Loss and AMT credit carryforwards $ 2,493 $ 3,629
- ----------------------------------------------------------------------------------
Store closing reserve 2,124 495
- ---------------------------------------------------------------------------------
Allowance for receivables 357 393
- ---------------------------------------------------------------------------------
Property and equipment 827 1,031
- ---------------------------------------------------------------------------------
Other 400 817
- ----------------------------------------------------------------------------------
6,201 6,365
Inventory valuation (2,397) (2,170)
- ----------------------------------------------------------------------------------
Deferred income (3,189) (3,556)
- ---------------------------------------------------------------------------------
Other (649) (649)
- ----------------------------------------------------------------------------------
(6,235) (6,375)
Net deferred tax liability (34) (10)
- ---------------------------------------------------------------------------------
Current tax balance (2,051) 275
- ---------------------------------------------------------------------------------
$(2,085) $ 265
==================================================================================
</TABLE>
There were no significant deferred tax valuation allowances as of February 27,
1999 and February 28, 1998. Significant components of the provision for income
taxes are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,494 $ 579 $ 339
- ------------------------------------------------------------------
State and local 242 264 242
- ------------------------------------------------------------------
Total current 2,736 843 581
- ------------------------------------------------------------------
Deferred 24 610 500
- ------------------------------------------------------------------
$ 2,760 $ 1,453 $ 1,081
==================================================================
</TABLE>
The reconciliation of income tax computed at the U.S. federal
statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $2,230 $1,069 $ 759
- -----------------------------------------------------------------
State income tax, net 160 174 160
- ------------------------------------------------------------------
Goodwill 186 186 186
- ------------------------------------------------------------------
Other, net 184 24 (24)
- ------------------------------------------------------------------
$2,760 $1,453 $1,081
=================================================================
</TABLE>
16 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company received refunds, net of income taxes paid, of $2,060,000 during
Fiscal 1998, and made income tax payments of $1,050,000 in Fiscal 1997 and
$478,000 in Fiscal 1999. At February 27, 1999, the Company has $2,493,219 of
alternative minimum tax credit carry forward which has no expiration date.
NOTE 7 - SHAREHOLDERS' EQUITY
The Company has authorized 2,000,000 shares of $1.00 par value preferred stock.
The terms of the preferred stock are subject to determination by the Company's
Board of Directors. The Company has a shareholder rights plan which provides for
the distribution of a right to purchase one-hundredth of a share of preferred
stock to each holder of common stock. The rights become exercisable upon the
occurrence of certain triggering events, as defined in the plan. The Company has
reserved 33,900 shares of Series A Preferred Stock in connection with the rights
to be distributed under the plan with respect to the reserved shares of common
stock. The rights plan was renewed during Fiscal 1999.
NOTE 8 - STOCK OPTION PLANS
The Company has adopted stock option plans for key employees. Under such plans,
the Board of Directors may grant options for shares of common stock at a price
not less than 100 percent of the fair market value of the shares on the date of
grant. If an employee owns stock possessing more than 10 percent of the total
combined voting power of the Company, the option price must be 110 percent of
the fair market value on the date of grant. The options vest based on the term
of the optionee's continuous employment at 10 percent to 30 percent per year.
Service prior to date of grant is considered under certain plans.
In Fiscal 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." In
accordance with the provisions of SFAS No. 123, the Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options and,
accordingly does not recognize compensation costs when the exercise price of its
employee stock options is equal to or greater than the fair market value of the
stock at the grant date. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, net income would have been impacted by $125,000, $55,000 and
$59,000 in Fiscal 1999, 1998 and 1997, respectively. The financial effects of
applying SFAS No. 123 for providing proforma disclosures are not likely to be
representative of the effects on reported net income and earnings per share for
future years.
The estimated fair value of the options is amortized into expense over the
options' vesting periods. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for Fiscal 1999, 1998 and 1997: Risk-free interest
rate of 6.5 percent; no dividend yield; volatility factor of the expected market
price of the Company's common stock of 0.44; and a weighted-average expected
life of each option of five years.
A summary of the Company's stock option activity during 1999, 1998, and
1997 and related information follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SHARES UNDER OPTION
- -----------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997
==========================================================================================
<S> <C> <C> <C>
Outstanding, beginning of year 796 916 881
- -----------------------------------------------------------------------------------------
Granted (at $4.16 to $6.50 per share) 152 - 118
- -----------------------------------------------------------------------------------------
Cancelled (74) (93) (83)
- -----------------------------------------------------------------------------------------
Exercised (at $4.81 to $6.50 per share) (6) (27) -
- -----------------------------------------------------------------------------------------
Outstanding, end of year
(at prices ranging from $4.03 to $8.81 per share) 868 796 916
- -----------------------------------------------------------------------------------------
Exercisable, end of year
(at prices ranging from $4.03 to $8.81 per share) 678 655 761
==========================================================================================
</TABLE>
The weighted average per share price for options outstanding was $5.23 and $5.02
at the end of fiscal years 1999 and 1998, respectively.
At the end of fiscal years 1999, 1998, and 1997 there were 55,000, 187,000,
and 149,000 shares, respectively, reserved for future grants.
NOTE 9 - ACQUISITIONS
On February 5, 1999 the Company completed its purchase of substantially all of
the assets of the Vix drug store chain, which operates twelve deep discount drug
stores in the Buffalo and Rochester, New York areas. Both areas represent new
markets for the Company. The acquired stores were operated under the Vix name by
Tops, a division of Ahold International. The Company paid $31.2 million in cash
for the assets of the business and assumed all store real estate leases. No
other liabilities were assumed. The acquisition was accounted for as a purchase.
The Fiscal 1999 consolidated statement of operations reflects the results of
operations of the acquired stores since the date acquired.
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - DEFINED CONTRIBUTION PLAN
The Company provides a defined contribution 401(k) plan to substantially all
employees. Participants may make voluntary contributions to the plan of up to 15
percent of their compensation. Approximately $151,000, $154,000, and $65,000 was
charged to expense for this plan in fiscal years 1999, 1998 and 1997,
respectively.
NOTE 11 - SETTLEMENT OF LITIGATION
During Fiscal 1999, the Company reached a confidential settlement agreement with
one of its franchisees to resolve a longstanding lawsuit. The impact of the
settlement and associated legal costs was accounted for and reflected in the
Fiscal 1998 results, net of a third-party recovery. The Company recorded a
recovery of related prior period legal costs as a special credit in Fiscal 1998.
NOTE 12 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997
====================================================================================
<S> <C> <C> <C>
NUMERATOR:
Net income and numerator for basic
earnings per share - income available
to common stockholders $ 3,799 $ 1,691 $ 1,152
- ------------------------------------------------------------------------------------
Effect of dilutive securities:
7.75% convertible debentures (1) -- -- --
- ------------------------------------------------------------------------------------
Numerator for diluted earnings
per share - income available to common
stockholders after assumed conversions $ 3,799 $ 1,691 $ 1,152
- ------------------------------------------------------------------------------------
DENOMINATOR:
Denominator for basic earnings
per share - weighted-average shares 13,180 13,180 13,169
- ------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options (2) 34 17 13
- ------------------------------------------------------------------------------------
7.75% convertible debentures (1) -- -- --
- ------------------------------------------------------------------------------------
Dilutive potential common shares -- -- --
- ------------------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions 13,214 13,197 13,182
- ------------------------------------------------------------------------------------
Basic earnings per share $ 0.29 $ 0.13 $ 0.09
- ------------------------------------------------------------------------------------
Diluted earnings per share $ 0.29 $ 0.13 $ 0.09
====================================================================================
</TABLE>
(1) The effect of the 7.75% convertible debentures is antidilutive and thus
excluded in the calculation of diluted earnings per share.
(2) 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.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings Earnings
Per Common Per Common Stock Prices
Net Gross Net Share Share ------------ Dividends Paid
Sales Profit Income (Basic) (Diluted) High Low Per Common Share
<S> <C> <C> <C> <C> <C> <C> <C> <C>
================================================================================================================================
1999:
First quarter $209,172 $ 43,629 $ 728 $ .06 $ .06 $4.56 $3.81 --
- --------------------------------------------------------------------------------------------------------------------------------
Second quarter 204,845 42,570 3,286 .25 .24 4.81 3.75 --
- --------------------------------------------------------------------------------------------------------------------------------
Third quarter 199,132 42,881 (767) (.06) (.06) 4.69 3.19 --
- --------------------------------------------------------------------------------------------------------------------------------
Fourth quarter 226,294 47,649 552 .04 .04 8.69 4.13 --
- --------------------------------------------------------------------------------------------------------------------------------
$839,443 $176,729 $ 3,799 $ .29 $ .29 --
================================================================================================================================
1998:
First quarter $209,214 $ 44,622 $ 528 $ .04 $ .04 $5.50 $4.13 --
- --------------------------------------------------------------------------------------------------------------------------------
Second quarter 204,235 43,549 274 .02 .02 5.31 4.00 --
- --------------------------------------------------------------------------------------------------------------------------------
Third quarter 199,571 42,344 283 .02 .02 4.75 3.75 --
- --------------------------------------------------------------------------------------------------------------------------------
Fourth quarter 223,385 47,774 606 .05 .05 5.38 3.88 --
- --------------------------------------------------------------------------------------------------------------------------------
$ 836,405 $178,289 $ 1,691 $ .13 $ .13 --
================================================================================================================================
</TABLE>
18 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
DRUG EMPORIUM, INC.
We have audited the accompanying consolidated balance sheets of Drug Emporium,
Inc. and subsidiaries as of February 27, 1999 and February 28, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended February 27, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Drug Emporium, Inc. and subsidiaries at February 27, 1999 and February 28, 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 27, 1999, in conformity with
generally accepted accounting principles.
/s/ Ernst + Young LLP
Columbus, Ohio
April 15, 1999
REPORT OF MANAGEMENT
The Management of Drug Emporium is responsible for the integrity and objectivity
of the financial statements and related information. Accounting principles used
in preparing the financial statements are those that are generally accepted in
the United States, and include amounts that are based on our best judgments with
due consideration given to materiality.
Drug Emporium is dedicated to the highest standards of integrity, ethics
and social responsibility. This dedication is reflected in written policy
statements covering, among other subjects, compliance with all laws, proper
business practices and adherence to the highest standards of conduct and
practices in transactions with suppliers. Management's responsibilities are
documented in the Company's Code of Conduct Policy which is reviewed and signed
annually by members of management.
Management believes that a sound, dynamic system of internal financial
controls that balances benefits and costs provides the best safeguard for
Company assets. Professional financial managers are responsible for implementing
and overseeing the financial control system, reporting on management's
stewardship of the assets entrusted to it by shareholders and maintaining
accurate records.
The Audit Committee of the Board of Directors is composed entirely of
outside directors and meets at least annually with the independent auditors and
management. The independent auditors have free access to the committee. The
Audit Committee concerns itself with the scope of the audit, the adequacy of
internal controls, the quality of financial reporting and other related matters.
The Company has retained the services of Ernst & Young LLP as independent
auditors. The independent auditors maintain an understanding of the internal
control structure of the Company and conduct such tests and other auditing
procedures considered necessary in the circumstances to express the opinion in
the report.
/s/ David L. Kriegel
David L. Kriegel
Chairman and Chief Executive Officer
/s/ Michael P. Leach
Michael P. Leach
Chief Financial Officer
[LOGO] DRUG EMPORIUM, INC. AND SUBSIDIARIES 19
<PAGE> 22
BOARD OF DIRECTORS AND COMPANY MANAGEMENT
BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
John Havlicek(3)
Franchise Owner
Wendy's International, Inc.
Donald B. Hayes, Sr.(1)
Chairman andCEO
Mainbancorp, Inc.
David L. Kriegel(3)
Chairman, CEO and President
Drug Emporium, Inc.
Robert W. McCurdy, R.Ph.(1)
Assistant to the Dean
Ohio Northern University
Walter E. Sinterman(2)
President
Sinco, Inc.
William L. Sweet, Jr.(2)
Partner
Beckman Lawson, LLP
Wesley C. Wright(1)
President
Diversified Retail Solutions
(1) Audit Committee
(2) Compensation Committee
(3) Executive Committee
- -------------------------------------------------------------------------------
[PHOTOGRAPH]
V. J. Wiechart, Sr. R.Ph.
Member of the Board Directors and
Drug Emporium Foundation Trustee
[PHOTOGRAPH]
Roy Kerscher
Member of the Franchise Advisory
Board and Drug Emporium
Foundation Trustee
In 1998, the Company was saddened by the passing of two people who were very
dear and important to us: V.J. "Tom" Wiechart and Roy J. Kerscher.
Mr. Wiechart served on our Board of Directors from 1993 until his death in
August 1998. In addition, he was a member of our Audit Committee. As a
registered pharmacist and the owner of several pharmacies, he brought to the
Company a unique and valuable perspective and keen business sense.
As a member of our Franchise Advisory Board Mr. Kerscher was a valuable
contributor to our Company. His in-depth knowledge of the grocery business, his
ability to devise creative solutions to challenging issues, and the care and
dedication he brought to his work made him a great asset to us.
Mr. Wiechart and Mr. Kerscher will both be missed. We extend our
condolences to both their families.
- -------------------------------------------------------------------------------
CORPORATE OFFICERS
- --------------------------------------------------------------------------------
David L. Kriegel
Chairman, CEO and President
A. Joel Arnold, R.Ph.
Senior Vice President
Thomas H. Ziemke
Senior Vice President
Jane H. Lagusch
Vice President and Secretary
Michael P. Leach
Chief Financial Officer and Treasurer
Lee Pfrogner, R.Ph.
Vice President
FRANCHISE ADVISORY BOARD
- --------------------------------------------------------------------------------
William O. Conn
Volunteer Drug Distributors, Inc.
Charlotte, NC Franchise
Timothy B. Dargusch
Director - Franchise Operations
Richard Gibson
Emporium Drug Mart, Inc.
Longview, TX Franchise
Ron Mann
Mann Drug, Inc.
Brownsville/Victoria, TX Franchise
James A. Stiffler
Jim Stiffler, Inc.
Westerville, OH
Alan Stotsky, R.Ph.
American Coastal Realty
Detroit, MI
REGIONAL OPERATORS
- -------------------------------------------------------------------------------
Earl J. Connell
Vice President - Eastern Region
Victor J. Tenuto
Vice President - Great Lakes Region
Roger D. Wilson
Vice President - Southeastern Region
Ronald L. Schneider, R.Ph.
Director - Western Region
Richard D. Jump
Director - Central Region
David L. Seimetz
Vice President - Midwest Region
DEPARTMENT DIRECTORS
- -------------------------------------------------------------------------------
Stephen M. Denovchek, RPh.
Director - Pharmacy Operations
Larry Hood
Director - Purchasing
Louis C. Matt, Jr.
Director - Real Estate &
Store Planning
Terry L. Moore
Controller
Kimberly A. Oeberst
Director - Human Resources
James J. Schanzenbach
Director of Information Services
DRUG EMPORIUM FOUNDATION TRUSTEES
- -------------------------------------------------------------------------------
Gene Graves
Chairman and CEO
Lakeview Farms, Inc.
David L. Kriegel
Chairman, CEO and President
Drug Emporium, Inc.
Thomas J. Moening
Chairman and CEO
Webb Insurance Agency, Inc.
20 DRUG EMPORIUM, INC. AND SUBSIDIARIES [LOGO]
<PAGE> 23
[PHOTOGRAPH]
Gene Wilborn, of Emporium Drug Mart, Inc., accepted the Franchise Operator of
the Year Award at the Company's Annual Show in August.
Emporium Drug Mart, Inc. operates eleven stores in Denton, Longview,
Amarillo, Abilene, Lubbock, Waco and Tyler, Texas; Wichita, Kansas; Shreveport
and Lafayette, Louisiana and Little Rock, Arkansas.
CORPORATE INFORMATION
CORPORATE OFFICES
Drug Emporium, Inc.
155 Hidden Ravines Drive
Powell, Ohio 43065
Phone: 740/548-7080
WEB SITE ADDRESS
http://www.DrugEmporium.com
AUDITORS
Ernst & Young LLP
Columbus, Ohio
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
STOCK TRADING AND BOND TRADING
Common Shares are traded on the Nasdaq National Market under the symbol DEMP.
The Company's 7-3/4% Convertible Subordinated Debentures, due October 1, 2014,
are traded on the Nasdaq system under the symbol DEMPG.
STOCK PRICES
Information on stock prices and dividends is reflected in Note 13 of the
consolidated financial statements. At April 26, 1999, the Company had
approximately 4,200 beneficial holders of its common stock.
FORM 10-K
A copy of the annual report on Form 10-K for the fiscal year ended February 27,
1999 is available without charge to any stockholder upon written request
directed to the Corporate Secretary.
<PAGE> 24
THANK YOU FOR SHOPPING AT
DRUG EMPORIUM, F&M AND VIX STORES.
CORPORATE OFFICES: Drug Emporium, Inc. 155 Hidden Ravines Drive
Powell, Ohio 43065 740.548.7080
ON-LINE STORE: http://www.DrugEmporium.com
ARKANSAS
*9112 Rodney Parham Road, Suite 110
Little Rock, AR 72205
CALIFORNIA
9922 Katella Avenue
Anaheim, CA 92804
3555 Clares Street
Capitola, CA 95010
12155 Central Avenue
Chino, CA 91710
1067 N. Grand Avenue
Covina, CA 91724
16119 Brookhurst
Fountain Valley, CA 92708
3171 Walnut Avenue
Fremont, CA 94538
2475 E. Chapman Avenue
Fullerton, CA 92631
9062 Adams Avenue
Huntington Beach, CA 92646
4951 La Palma Avenue
La Palma , CA 90623
1941 West Imperial Highway
La Habra, CA 90631
17875 Colima Road
La Puente, CA 91748
6030 Lankershim Avenue
N. Hollywood, CA 91606
5833 Jarvis Avenue
Newark, CA 94560
1538 E. Chapman Avenue
Orange, CA 92866
2701 Manhattan Beach
Redondo Beach, CA 90278
1880 S. Pacific Coast Hwy
Redondo Beach, CA 90277
5931 University Avenue
San Diego, CA 92115
4950 C Almaden Expressway
San Jose, CA 95118
9805 Campo Road
Spring Valley, CA 91977
24663 Crenshaw Boulevard
Torrance, CA 90505
13852 Red Hill Avenue
Tustin, CA 92680
GEORGIA
191 Alps Road
Athens, GA 30606
2953 N. Druid Hills Road
Atlanta, GA 30329
2625 Piedmont Road
Atlanta, GA 30324
2909 Washington Road
Augusta, GA 30909
3999 Austell Road
Austell, GA 30001
1543 Highway 138
Conyers, GA 30208
7424 Douglas Boulevard
Douglasville, GA 30135
2320 Pleasant Hill Road
Duluth, GA 30136
4400 Roswell Road, Suite 128
Marietta, GA 30062
3605 Sandy Plains Rd, Suite 300
Marietta, GA 30066
4975 Jimmy Carter Boulevard
Norcross, GA 30093
4015 Holcomb Bridge Road
Norcross, GA 30071
11060 Alpharetta Highway
Roswell, GA 30076
1475 Holcomb Bridge Road
Roswell, GA 30076
1900 Rockbridge Road
Stone Mountain, GA 30087
4000 La Vista Road
Tucker, GA 30084
4740 Jonesboro Road
Union City, GA 30291
INDIANA
700 Eastern Boulevard
Clarksville, IN 47130
KANSAS
9301 Santa Fe
Overland Park, KS 66212
*8829 West Central Avenue
Wichita , KS 67212
KENTUCKY
2310 Buttermilk Crossing
Crescent Springs, KY 41017
7654 Mall Road
Florence, KY 41042
90 Alexander Pike
Ft. Thomas, KY 41075
6801 Dixie Highway
Louisville, KY 40258
7100 Preston Highway
Louisville, KY 40219
4944 Shelbyville Road
Louisville, KY 40207
LOUISIANA
*500 Bertrand Drive
Lafayette, LA 70506
*5819 East Kings Highway
Shreveport, LA 71105
MARYLAND
6501 Baltimore National Pike
Baltimore, MD 21228
570 Baltimore Pike
Bel Air, MD 21014
5416 Annapolis Road
Bladensburg, MD 20710
1403 Merritt Boulevard
Dundalk, MD 21222
6320 Ritchie Highway
Glen Burnie, MD 21061
6197 Livingston Road
Oxon Hill, MD 20745
801 Goucher Boulevard
Towson, MD 21204
MICHIGAN
2105 South Telegraph Road
Bloomfield Hills, MI 48302
22200 Michigan Avenue
Dearborn, MI 48124
18859 East Nine Mile Road
Eastpointe , MI 48021
30100 Grand River Avenue
Farmington Hills, MI 48336
31005 Orchard Lake Road
Farmington Hills, MI 48334
280 West Nine Mile
Ferndale, MI 48220
1700 Dix Avenue
Lincoln Park, MI 48146
13505 Middlebelt Road
Livonia, MI 48150
1260 Rochester Road
Rochester Hills, MI 48307
30777 Gratiot Ave.
Roseville, MI 48066
31157 Woodward Ave.
Royal Oak, MI 48073
29712 Southfield Road
Southfield, MI 48076
14544 Racho Road
Taylor, MI 48180
27690 Van Dyke
Warren , MI 48093
35715 Warren Road
Westland, MI 48185
MINNESOTA
503 87th Lane NE
Blaine, MN 55434
5900 Shingle Creek Parkway
Brooklyn Center, MN 55430
780 West 66th Street
Richfield, MN 55423
MISSOURI
*2341 S M-291 Highway
Independence, MO 64057
*1020 West 103rd Street
Kansas City, MO 64114
10320 Manchester Road
Kirkwood, MO 63122
7435 Watson Road
Shrewsbury, MO 63119
10550 Baptist Church Road
St. Louis, MO 63128
1067 Regency Parkway
I-70 and Zembehl Road
St. Charles, MO 63301
NEW JERSEY
Route 38 & Cuthbert Road
Cherry Hill, NJ 08002
100 Barclay SC/Route #70 E.
Cherry Hill, NJ 08034
1690 Nottingham Way
Hamilton, NJ 08619
310 White Horse Pike
Lawnside, NJ 08045
3371 Brunswick Pike
Lawrenceville, NJ 08648
Route 38 & Lenola Road
Moorestown, NJ 08057
*2888 Route 10 West
Morris Plains, NJ 07950
1014 Rt. 9 & Ernston Road
Parlin, NJ 08859
1 Shoppers Lane
Turnersville, NJ 08012
*3196 Kennedy Blvd.
Union City, NJ 07087
NEW YORK
3330 Sheridan Drive
Amherst, NY 14226
1740 Kenmore Avenue
Buffalo, NY 14216
101 French Road, Suite 20
Cheektowaga, NY 14227
3401 Genesee Street
Cheektowaga, NY 14225
100 Village Landing
Fairport, NY 14450
2255 E. Ridge Road
Irondequoit, NY 14622
3640 Delaware Avenue
Kenmore, NY 14217
2429 Military Road
Niagara Falls, NY 14304
3333 W. Henrietta Road
Rochester, NY 14623
1900 Ridge Road
West Seneca, NY 14224
705 Maple Road
Williamsville, NY 14221
4101 Transit Road
Williamsville, NY 14221
NORTH CAROLINA
*8330 Pineville Matthews Road
Charlotte, NC 28226
*5401 South Boulevard, Suite 230-A
Charlotte, NC 28217
*6321 Albemarle Road
Charlotte, NC 28212
*3400 Westgate Drive
Durham, NC 27707
*2803 Battleground Avenue
Greensboro, NC 27408
*980 Cloverleaf Plaza
Kannapolis, NC 28083
*8111 Creedmoor Road
Raleigh, NC 27613
OHIO
6106 Wilmington Pike
Centerville, OH 45459
3670 Werk Road
Cincinnati, OH 45248
2692 Madison Avenue, Suite B
Cincinnati, OH 45208
8445 Colerain Avenue
Cincinnati, OH 45239
485 East Kemper Road
Cincinnati, OH 45246
8590 Beechmont Avenue
Cincinnati, OH 45255
7700 Montgomery Road
Cincinnati, OH 45236
3790 East Broad Street
Columbus, OH 43213
260 Graceland Boulevard
Columbus, OH 43214
2650 Bethel Road
Columbus, OH 43220
3574 Soldano Blvd
Columbus, OH 43228
5737 Emporium Square
Columbus, OH 43231
5439 Salem Avenue
Dayton, OH 45426
5522 Springboro Pike
Dayton, OH 45449
7040 Perimter Loop Drive
Dublin, OH 43016
379 Stoneridge Lane
Gahanna, OH 43230
965 Hebron Road
Heath, OH 43056
6430 Tussing Road
Reynoldsburg, OH 43068
OKLAHOMA
4202 N.W. Expressway
Oklahoma City, OK 73116
PENNSYLVANIA
925 Easton Road
Abington, PA 19001
239 Concord Road
Aston, PA 19014
2637 Street Road
Bensalem, PA 19020
2920 Springfield Road
Broomall, PA 19008
125 West Lincoln Highway
Exton, PA 19341
305 Lancaster Pike
Frazer, PA 19355
610 Old York Road
Jenkinstown, PA 19046
553 South Broad Street
Lansdale, PA 19446
Route 1
Levittown, PA 19056
2830 Dekalb Pike
Norristown, PA 19401
1200 Welsh Road
North Wales, PA 19454
24th & Oregon
Philadelphia, PA 19145
9212 Franford Avenue At Linden
Philadelphia, PA 19114
3899 Aramingo Avenue
Philadelphia, PA 19137
6515 Castor Avenue
Philadelphia, PA 19149
314 Lewis Road
Royersford, PA 19468
550 East Lancaster Avenue
St. David, PA 19087
2637 Ridge Pike
Trooper, PA 19403
501 South 69th Street
Upper Darby, PA 19082
599 Old York Road
Warminster, PA 18974
TEXAS
*2550 Barrow Street
Abilene, TX 79605
*4210 B S.W. 45th Avenue
Amarillo, TX 79109
*800 E. Road To Six Flags
Arlington, TX 76011
*3700 Bee Caves Road
Austin, TX 78746
*7301 Burnet Road, #200
Austin, TX 78757
*230 Security Drive
Brownsville, TX 78521
*3065 N. Josey Lane
Carrollton, TX 75006
*12801 Midway Road
Dallas, TX 75244
*9661 Audelia Road, Suite 300
Dallas, TX 75238
*5517 Arapaho Road
Dallas, TX 75248
*354 Hillside Village
Dallas, TX 75214
*824 West University
Denton, TX 76201
*6242 Hulen Bend Boulevard
Ft. Worth, TX 76132
*6900 Ridgmar Meadow Road
Ft. Worth, TX 76116
*950 W. Centerville Road
Garland, TX 75041
*770 Bedford-Eugless Road
Hurst, TX 76053
*420 E. FM 3040, Suite 700
Lewisville, TX 75067
*2321 West Loop 281
Longview, TX 75604
*5109 82nd Street
Lubbock, TX 79424
*2201 Preston Road - Suite B
Plano, TX 75093
*1021 N. Central Expressway
Plano, TX 75075
*1736 E. Beltline Road
Richardson, TX 75081
*50 Dal Rich Shopping Center
Richardson, TX 75080
*2211 NW Military Highway, #127
San Antonio, TX 78213
*1530 Austin Highway, #101
San Antonio, TX 78218
*5614 South Broadway
Tyler, TX 75703
*4303 N. Navarro Street, North
Victoria, TX 77901
*5900 Bosque Boulevard
Waco, TX 76710
VIRGINIA
5935 Centreville Crest Lane
Centreville, VA 22020
*2165 Cunningham Drive
Hampton, VA 23666
*3750 Virginia Beach Boulevard #25
Virginia Beach, VA 23452
WISCONSIN
16800 Blue Mound Road
Brookfield, WI 53005
6200 West Brown Deer Road
Brown Deer, WI 53223
5050 S. 74th Street
Greenfield, WI 53221
6251 S. 27th Street
Greenfield, WI 53221
1537 E. Moreland Boulevard
Waukesha, WI 53186
10909 West Oklahoma Avenue
West Allis, WI 53227
WEST VIRGINIA
*3 Mall Road
Barboursville, WV 25504
*120 Beckley Crossing
Beckley, WV 25801
*5101 McCorkle Avenue, SE
Charleston, WV 25304
*1603 Kanawha
Boulevard West
Charleston, WV 25312
* FRANCHISE LOCATIONS
[LOGO] Printed in the U.S.A. on recycled paper
(C) 1999 Drug Emporium, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, Numbers 33-25768 and 33-69638) of Drug Emporium, Inc. and
subsidiaries of our report dated April 15, 1999, with respect to the
consolidated financial statements of Drug Emporium, Inc. and subsidiaries,
incorporated by reference in this Annual Report (Form 10-K) for the year ended
February 27, 1999.
ERNST & YOUNG LLP
Columbus, Ohio
May 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-27-1999
<EXCHANGE-RATE> 1
<CASH> 893
<SECURITIES> 0
<RECEIVABLES> 18,323
<ALLOWANCES> 0
<INVENTORY> 164,789
<CURRENT-ASSETS> 186,324
<PP&E> 79,459
<DEPRECIATION> 48,751
<TOTAL-ASSETS> 230,689
<CURRENT-LIABILITIES> 121,692
<BONDS> 49,925
0
0
<COMMON> 1,319
<OTHER-SE> 53,903
<TOTAL-LIABILITY-AND-EQUITY> 230,689
<SALES> 839,443
<TOTAL-REVENUES> 839,443
<CGS> 662,714
<TOTAL-COSTS> 171,444
<OTHER-EXPENSES> (6,760)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,487
<INCOME-PRETAX> 6,558
<INCOME-TAX> 2,759
<INCOME-CONTINUING> 3,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,799
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
