<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
November 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
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DRUG EMPORIUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1064888
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
155 Hidden Ravines Drive, Powell, Ohio 43065
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 548-7080
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at November 27, 1999
- ----------------------------- -----------------
Common Stock, $ .10 par value 13,193,285 shares
----------
<PAGE> 2
<TABLE>
INDEX
DRUG EMPORIUM, INC.
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 8-12
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE> 3
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<CAPTION>
November 27, 1999 February 27, 1999
----------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 1,479 $ 893
Accounts receivable ........................................ 33,345 18,323
Inventories, net of LIFO reserve of $24.9
million and $22.8 million at November 27, 1999
and February 27, 1999, respectively .................... 186,985 164,789
Other ...................................................... 2,846 2,319
-------- --------
Total current assets ............................... 224,655 186,324
Property and equipment, net .................................. 34,662 30,708
Goodwill ..................................................... 9,498 10,237
Other assets ................................................. 6,101 3,420
-------- --------
Total assets ....................................... $274,916 $230,689
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line ................................... $ 80,959 $ 15,106
Accounts payable ........................................ 72,681 80,393
Accrued liabilities ..................................... 14,202 22,047
Deferred income ......................................... 2,388 3,904
Current maturities of long-term debt ................... 2,515 242
-------- --------
Total current liabilities .......................... 172,745 121,692
Deferred rent ................................................ 3,650 3,850
Convertible subordinated debt ................................ 49,421 49,421
Long-term debt, other ........................................ 2,041 504
-------- --------
Total long-term debt ............................... 51,462 49,925
Shareholders' equity:
Preferred stock, authorized 2,000,000
Shares, none issued .................................... -- --
Common stock, stated value $.10 per share,
Authorized 28,000,000, issued and
outstanding 13,193,285 at November 27, 1999
and 13,185,785 at February 27, 1999 .................... 1,320 1,319
Additional paid-in capital ................................. 32,198 32,155
Retained earnings .......................................... 13,541 21,748
-------- --------
Total shareholders' equity ......................... 47,059 55,222
-------- --------
Total liabilities and shareholders' equity ......... $274,916 $230,689
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share data)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................... $ 218,548 $ 199,132 $ 667,906 $ 613,149
Cost of sales ....................................... 173,629 156,251 524,848 484,069
--------- --------- --------- ---------
Gross margin .................................... 44,919 42,881 143,058 129,080
Selling, administrative and
occupancy expenses ............................. 55,159 42,980 150,705 126,227
Special charges (credits) ........................... -- -- -- (6,760)
Interest expense, net ............................... 2,467 1,278 6,029 4,206
--------- --------- --------- ---------
Income (loss) before
provision for income
taxes .......................................... (12,707) (1,378) (13,676) 5,407
Provision (benefit) for
income taxes ................................... (5,082) (611) (5,469) 2,160
--------- --------- --------- ---------
Net income (loss) ................................... $ (7,625) $ (767) $ (8,207) $ 3,247
========= ========= ========= =========
Earnings (loss) per common share:
Basic ............................................. $ (.58) $ (.06) $ (.62) $ .25
========= ========= ========= =========
Diluted ........................................... $ (.58) $ (.06) $ (.62) $ .25
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic ............................................. 13,193 13,180 13,192 13,180
========= ========= ========= =========
Diluted ........................................... 13,193 13,180 13,192 13,186
========= ========= ========= =========
Supplementary information:
LIFO provision included
in cost of sales ............................... $ 720 $ 650 $ 2,160 $ 1,950
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
-----------------
November 27, 1999 November 28, 1998
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income (loss) ................................................. $ (8,207) $ 3,247
Adjustments to reconcile to cash provided by (used in) Operations:
Depreciation and amortization ................................ 7,949 6,757
LIFO provision ............................................... 2,160 1,950
Cash provided by (used for) operating assets and liabilities:
Accounts payable and accrued liabilities ..................... (17,193) 7,962
Accounts receivable .......................................... (15,022) 4,317
Inventories at current cost .................................. (24,356) (6,929)
Other ........................................................ (4,371) (1,788)
-------- --------
Net cash provided by (used in) operating activities ............... (59,040) 15,516
Investing activities:
Purchase of property and equipment, net ........................... (10,081) (3,388)
-------- --------
Net cash used in investing activities ............................. (10,081) (3,388)
Financing activities:
Net borrowings (repayments) under revolving
credit line .................................................. 65,853 (3,003)
Net borrowings (repayments) on term debt and other ................ 3,854 (9,315)
-------- --------
Net cash provided by (used in) financing activities ............... 69,707 (12,318)
-------- --------
Increase (decrease) in cash and cash
equivalents .................................................. 586 (190)
Cash and cash equivalents, beginning of period ...................... 893 783
-------- --------
Cash and cash equivalents, end of period ............................ $ 1,479 $ 593
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements include
the accounts of Drug Emporium, Inc. and subsidiaries. The information
furnished reflects all adjustments, which are, in the opinion of
management, necessary to fairly present the consolidated financial
position, results of operations and cash flows on a consistent basis.
2. The Company's cost of sales is computed using the gross profit method.
The gross profit percentage used is validated by physical inventories
conducted twice a year primarily in the second and fourth quarters and
the actual results of the LIFO calculations in the fourth quarter.
3. The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) and numerator
for basic earnings (loss)
per share-income (loss)
available to common
stockholders ................... $(7,625) $ (767) $(8,207) $ 3,247
Effect of dilutive securities:
7.75% convertible
debentures ..................... (A) (A) (A) (A)
------- ------ ------- -------
Numerator for diluted earnings
(loss) per share - income
(loss) available to common
stockholders after
assumed conversions ............ $(7,625) $ (767) $(8,207) $ 3,247
======= ====== ======= =======
Denominator:
Denominator for basic earnings
(loss) per share - weighted-
average shares ................... 13,193 13,180 13,192 13,180
Effect of dilutive securities:
Employee stock options ......... (B) (B) (B) 6
7.75% convertible
debentures ..................... (A) (A) (A) (A)
------- ------ ------- -------
Denominator for diluted earnings
(loss) per share - adjusted
weighted-average shares and
assumed conversions ............ 13,193 13,180 13,192 13,186
======= ====== ======= =======
Basic earnings (loss) per share ..... $ (.58) $ (.06) $ (.62) $ .25
======= ====== ======= =======
Diluted earnings (loss) per share ... $ (.58) $ (.06) $ (.62) $ .25
======= ====== ======= =======
</TABLE>
(A) The effect of the 7.75% convertible debentures is antidilutive and thus
excluded in the calculation of diluted earnings per share.
(B) Additional options to purchase shares of common stock were outstanding
during each period but were not included in the computation of diluted
earnings per share because the exercise price of the options was
greater than the average market price of the common shares and
therefore, the effect would be antidilutive.
6
<PAGE> 7
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. In March 1997, the Company established an e-commerce site on the
Internet with the URL DrugEmporium.com. This site served as the
foundation for the Company's current efforts to develop an online
drugstore, which is also known as DrugEmporium.com. This redesigned
site launched early in the third quarter of this fiscal year. The
pre-tax loss for DrugEmporium.com was $5.5 million for the quarter and
$6.9 million year to date. In addition to funding this pretax loss, the
Company has also funded approximately $3.1 million in capital
expenditures for DrugEmporium.com and in addition serves as the
guarantor of certain obligations incurred by its online subsidiary
totaling approximately $7.7 million.
5. During the prior year second quarter, the Company entered into an
agreement with Western Drug Distributors, Inc., its franchise store
operator in the Seattle and Portland area, to terminate Western's
Franchise agreement related to the sale of Western Drug to Longs Drug
Stores of Walnut Creek, California. The Company's agreement with
Western Drug provided for a one-time lump sum payment to Drug Emporium,
Inc. of $15.4 million. Approximately $14.4 million of the payment was
related to the buyout and is recorded as part of a special credit in
the Company's statements of operations. The remaining amounts of the
payment relate primarily to franchise fee receivables accrued in the
normal course of business and reimbursements for legal costs and
interest.
6. Also during the prior year second quarter, the Company recorded special
and nonrecurring charges of $9.4 million. The charges include a noncash
component of $1.3 million to write down store equipment, fixtures and
leasehold improvements at store locations to be closed, an accrual of
$6.4 million to close seven underperforming store locations and record
additional costs related to the Washington, D.C. area vacant store
locations, and $1.7 million recorded as a component of gross margin due
to store closure-related inventory liquidations and other inventory
writedowns. The non-recurring inventory-related costs of the special
charge have been recorded as a component of gross margin in accordance
with Emerging Issues Task Force (EITF) Issue No. 96-9.
7. On December 10, 1999, the Company executed an amendment to its bank
credit agreement increasing its borrowing capacity under its revolving
credit line to $110 million at an increased interest rate of 25 basis
points.
8. The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10Q and
consequently do not include all of the disclosures normally required by
generally accepted accounting principles. Reference should be made to
the Company's Form 10-K for the fiscal year ended February 27, 1999
(File No. 0-16998) for additional disclosures including a summary of
the Company's accounting policies, which have not significantly
changed.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth selected items derived from the
Company's consolidated statements of operations expressed as a percentage of net
sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 27, 1999 November 28, 1998 November 27, 1999 November 28, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales (in thousands) ..... $218,548 $199,132 $667,906 $613,149
======== ======== ======== ========
Gross margin ................. 20.6% 21.5% 21.4% 21.3%(1)
Selling, administrative and
occupancy expenses ...... 25.2% 21.6% 22.6% 20.6%
-------- -------- -------- --------
Operating income (loss) ...... (4.6)% (.1)% (1.2)% .7%(2)
======== ======== ======== ========
</TABLE>
(1) Excluding nonrecurring store closure related inventory liquidations and
other inventory writedowns of $1.7 million.
(2) Excluding the effects of (1) above and the $6.4 million and $1.3
million of special charges related to non-inventory store closure
costs.
Third quarter sales increased 9.8% to $218.5 million in the current
year from $199.1 million in the prior year quarter. This increase is the result
of the addition of twelve VIX Stores purchased in February 1999 as well as a
1.6% increase in same store sales.
For the quarter, the Company's gross margin decreased as a percent of
sales from the prior year. This decrease resulted from a combination of slightly
lower pharmacy margins, higher distribution fees and lower vendor rebate income,
partially offset by lower shrink expense versus the prior year quarter. On a
year to date basis, gross margins are higher than in the prior year. Gross
margins as a percent of sales for the fourth quarter are expected to be
comparable to these year to date levels.
Higher payroll, professional fees, depreciation/amortization expense,
and credit card fees combined with lower franchise fee revenue contributed to
the increase in operating loss for the quarter relative to the prior year.
Payroll costs for the quarter were higher resulting largely from increased
payroll expense relating to the Company's e-commerce effort. Higher professional
fees were also primarily the result of the Company's e-commerce effort. Higher
depreciation/amortization expense was the result of goodwill related to the Vix
acquisition and the Company's intensified store remodeling program along with
other technology development initiatives. Credit card fees were higher for the
quarter as a result of an interchange fee increase, while franchise fee revenue
was lower as a result of the reduction in the number of franchise stores
primarily resulting from the sale of the Company's Seattle franchise in the
second quarter of Fiscal 1999.
Interest for the quarter and the year is higher, when compared to the
prior year, due to carrying a higher balance on the Company's revolving credit
facility. This higher balance versus the prior year is primarily the result of
the VIX acquisition, the termination (by McKesson Payment Systems) of the
pre-funding of third party accounts receivable amounts and the start up costs
related to DrugEmporium.com.
EBITDA for the third quarter of fiscal 2000 was $(6.4) million compared
to $2.5 million for last year's comparable quarter. Excluding e-commerce costs,
EBITDA was $(1.6) million for the quarter. For the nine-month period, EBITDA was
$2.5 million as compared to $10.3 million in the previous year. Excluding
e-commerce costs, year to date EBITDA was $8.5 million. Net income (loss) was
$(7.6) million for the quarter and $(8.2) million year to date. Excluding
e-commerce, net income (loss) was $(4.3) million for the quarter and $(4.1)
million year to date. Earnings (loss) per share was $(0.58) for the quarter and
$(0.62) year to date. Excluding e-commerce, earnings (loss) per share was
$(0.33) for the quarter and $(0.31) year to date.
8
<PAGE> 9
DrugEmporium.Com
- ----------------
In March 1997, the Company established an e-commerce site on the
Internet with the URL DrugEmporium.com. This site served as the foundation for
the Company's current efforts to develop an online drugstore, which is also
known as DrugEmporium.com. This redesigned site launched early in the third
quarter of this fiscal year. During the quarter, orders increased approximately
ten to fifteen percent per week in response to DrugEmporium.com's efforts to
aggressively promote the site. DrugEmporium.com currently employs approximately
eighty people at its headquarters and fulfillment operations and expects to
increase staffing by thirty percent during the fourth quarter.
The Company has incurred costs relating to DrugEmporium.com for site
development, payroll, advertising, and other costs during the third quarter that
resulted in a pretax loss of approximately $5.5 million included in the
Company's consolidated statement of operations. Additional DrugEmporium.com
operating losses are expected to continue until the sales volume is built to a
higher level. Although the Company expects to be able to fund future costs
through a third party equity investment in DrugEmporium.com, which is expected
to be secured during the fourth quarter of its current fiscal year; there is no
guarantee that this financing will be obtained. In the event financing is not
secured, the Company intends to fund all operating expenses relating to
DrugEmporium.com from its existing operations and credit facilities.
In addition to the $6.9 million of DrugEmporium.com's pretax loss
funded by the Company year-to-date, the Company has also funded approximately
$3.1 million in capital expenditures for DrugEmporium.com and also serves as the
guarantor of certain obligations incurred by its online subsidiary totaling
approximately $7.7 million. The Company plans to fund additional
DrugEmporium.com operating expenses during the fourth quarter prior to
DrugEmporium.com's planned external financing.
Store Growth and Remodels
- -------------------------
The following table lists openings for corporately owned stores and
store closings through the third quarter ended November 27, 1999 and the similar
prior year period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 27, 1999 November 28, 1998 November 27, 1999 November 28, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Number of stores at
beginning of period ........... 140 133 141 135
Stores opened or acquired ......... 0 0 2 0
Stores closed or sold ............. (1) (1) (4) (3)
---- ---- ---- ----
Total stores at end of period ..... 139 132 139 132
==== ==== ==== ====
</TABLE>
The Company has plans to open approximately five new stores in the next
twelve months and to continue its store growth after that time at a similar
pace. Approximately forty percent of the Company's stores have experienced a
major or minor remodeling since the Company began its ongoing program to update
and remodel its existing store base. These remodels are typically done in the
first and second quarters of the year so as not to interrupt business during the
holiday selling season.
9
<PAGE> 10
Balance Sheet Items
- -------------------
The Company's outstanding receivable balance is higher at the end of
November 1999, compared to February 1999 due to the termination (by McKesson
Payment Systems) of the pre-funding of third party accounts receivables. The
primary causes for higher inventory levels are the addition of the Vix stores
which have higher inventory levels than average Drug Emporium stores, usual
seasonal inventory build ups, and the addition of new product lines to the
Company's inventory mix. Capital expenditures related to the Company's
intensified store remodeling program, technology development initiatives, as
well as DrugEmporium.com capital expenditures and deferred costs account for the
increases in property and equipment and other assets. Factors affecting the
accounts payable balance are a $24 million vendor payment, which was deferred
and made shortly after fiscal year end, the seasonal buying cycle, and more
favorable terms from vendors. The decrease in accrued liabilities is largely the
result of costs charged to the reserve account for closed stores and a reduction
in the Company's accrual for income taxes. The increase in the revolving credit
facility versus February 1999 is the result of the factors described below under
"Liquidity and Capital Resources."
Liquidity and Capital Resources
- -------------------------------
The Company has a bank credit agreement (the "Agreement") which governs
its borrowings under its bank credit facility. As of November 27, 1999, the
Company's credit facility consisted of outstanding borrowings of $81.0 million.
This credit facility was increased to $110 million on December 10, 1999.
Significant items impacting the outstanding borrowings from the year-end level
of $15.1 million include a $24 million vendor payment which was deferred and
made shortly after year-end, the termination of the third party accounts
receivable pre-funding program by McKesson Pay Systems in June of this year
which resulted in an increase of approximately $15 million in accounts
receivable, the investment in Drug Emporium.com and the Company's seasonal
inventory build up. The Company believes that internally generated funds,
borrowings available under its Agreement, and the anticipated financing for
DrugEmporium.com are sufficient to finance its current operations. As of quarter
end, the Company is in compliance with all financial performance covenants as
required by its bank credit agreement.
Inventory Valuation
- -------------------
The Company uses the LIFO method of accounting for its inventories.
Under this method, the cost of merchandise sold and reported in the financial
statements approximates current cost. In computing its LIFO charge throughout
the fiscal year, the Company uses an estimated inflation rate, which was one and
one-half percent in both Fiscal 1999 and Fiscal 2000. This estimated LIFO charge
is adjusted at each year-end based upon the actual weighted average inflation
rate during the year.
Year 2000
- ---------
The Company's internal Year 2000 effort was 100 percent complete as of
the end of November 1999.
The Company has completed its assessment of the Information
Technology-related (IT-related) systems for the Year 2000 issue. All IT-related
systems, which include the Company's accounting software, AS400 applications,
host merchandising systems, store point of sale systems, vendor EDI documents
and other applications are Year 2000 compliant. The Company has also completed
its assessment of non-IT-related systems for Year 2000 compliance. All
significant non-IT related systems are Year 200 compliant as well.
The Company has surveyed its outside suppliers and software vendors
related to Year 2000 compliance. The external software companies that the
Company utilizes for pharmacy, merchandising, store point of sale, and
accounting systems have provided the Company with a Year 2000 compliant version
of their respective products.
The Company's total estimate of Year 2000 compliance costs is $1.5
million with $1.25 million estimated to be related to the purchase of hardware
and software that has been capitalized and $225,000 related to costs which have
been expensed as incurred.
10
<PAGE> 11
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 most
(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.
As of January 5, 2000, the Company has not experienced any significant
Year 2000 issues with any of its internal systems.
11
<PAGE> 12
Forward-Looking Statements
- --------------------------
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, except for historical information contained
herein, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature. All such forward-looking statements are based on the
current expectations of management and are subject to, and are qualified by,
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by those statements. These risks and
uncertainties include, but are not limited to the high level of competition as
to price and selection from a variety of sources, possible further downward
pressure on pharmacy margins from managed care networks, the Company's ability
to economically eliminate under-performing stores, the Company's ability to
identify and address all Year 2000 issues, the competitive environment of the
on-line drugstore industry, the ability of the company to secure and maintain
key contracts, relationships and financing related to its on-line store,
technical issues related to the development of the web site and general economic
conditions.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
10. Material Contracts
10.4. Amendment III to the Loan and Security Agreement BankBoston
Retail Finance, Inc. and Drug Emporium, Inc.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUG EMPORIUM, INC.
--------------------------------
(Registrant)
Date: January 5, 2000 By /s/ David L. Kriegel
--------------------- --------------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date: January 5, 2000 By /s/ Terry L. Moore
--------------------- --------------------------------
Terry L. Moore
Chief Financial Officer and
Treasurer
14
<PAGE> 1
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This Third Amendment to Loan and Security Agreement (the "Third
Amendment") is made as of this 10th day of December, 1999 by and between
BankBoston Retail Finance Inc. (in such capacity, herein the
"AGENT"), a Delaware corporation with offices at 40 Broad Street,
Boston, Massachusetts 02109, as agent for the ratable benefit of the
"LENDERS", who are party to the Agreement (defined below)
and
Drug Emporium, Inc. (hereinafter, the "BORROWER"), a Delaware
corporation with its principal executive offices at 155 Hidden Ravines
Drive, Powell, Ohio 43065
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.
W I T N E S S E T H:
WHEREAS, on October 28, 1998 the Agent, the Lenders and the Borrower
entered in a certain Loan and Security Agreement, as amended by a First
Amendment to Loan and Security Agreement dated May 5, 1999 and a Second
Amendment to Loan and Security Agreement dated September 10, 1999 (the
"Agreement"); and
WHEREAS, the Borrower, the Agent, and the Lender desire to amend
certain of the provisions of the Agreement;
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders and
the Borrower as follows:
1. Capitalized Terms. All capitalized terms used herein and not
otherwise defined shall have the same meaning herein as in the
Agreement.
2. Amendment to Article 1. The definition of "Base Margin Rate"
set forth in Article 1 of the Agreement is hereby amended to
read as follows:
"BASE MARGIN RATE": Base plus one-quarter percent (.25%).
3. Amendment to Article 1. The definition of "Commitment" set
forth in Article 1 of the Agreement is hereby amended to read
as follows:
<PAGE> 2
"COMMITMENT": Subject to Section 2-21, as follows:
<TABLE>
<CAPTION>
LENDER DOLLAR COMMITMENT COMMITMENT
PERCENTAGE
- ------ ----------------- ----------
<S> <C> <C>
BankBoston Retail $39,500,000.00 35.90%
Finance Inc.
National City $26,000,000.00 23.64%
Commercial Finance,
Inc.
LaSalle Business $25,000,000.00 22.73%
Credit, Inc.
American National Bank $19,500,000.00 17.73%
and Trust Company of
Chicago
</TABLE>
4. Amendment to Article 1. The definition of "Loan Ceiling" set
forth in Article 1 of the Agreement is hereby amended to read
as follows:
"LOAN CEILING": $110,000,000.00.
5. Amendment to Article 1. The LIBOR MARGIN PRICING GRID set
forth under the definition of "Libor Margin" in Article 1 of
the Agreement is hereby amended to read as follows:
<TABLE>
<CAPTION>
LIBOR MARGIN PRICING GRID
- -------------------------------------------------------------------------------------------
TIER FIXED CHARGE RATIO TRAILING/ROLLING 12 MONTH MARGIN (BASIS
AVERAGE EXCESS AVAILABILITY POINTS)
- ---- ------------------------- --------------------------- -------------
<S> <C> <C> <C>
I Equal or Greater than 1.7 Equal or Greater than 150
$20,000,000.00
II Equal or Greater than 1.7 Less than $20,000,000.00 175
III 1.26 to 1.69 N/A 175
IV 1.25 or less N/A 200
- -------------------------------------------------------------------------------------------
</TABLE>
6. Waiver of Compliance with Sections 4-18, 4-19, 4-20 and 4-23.
The Lenders waive compliance by the Borrower with the terms of
Sections 4-18, 4-19, 4-20 and 4-23 of the Agreement in
connection with the investments in
2
<PAGE> 3
and/or loans to be made to E-Commerce up to a maximum
aggregate amount of $17,500,00.00. No further amounts shall be
advanced to E-COMMERCE directly or indirectly, including by
way of any additional trade support. The Borrower shall be
required to pledge its stock or other investments in
E-Commerce and all notes or other indebtedness payable by
E-Commerce to the Agent and the Lenders. Provided that no
Event of Default is then occurring, the Agent shall release
such pledge at such time that E-COMMERCE procures initial
financing.
7. Amendment Fee. The Borrower shall pay to the Agent an
amendment fee as set forth in a separate fee letter between
the Agent and the Borrower.
8. Ratification of Loan Documents. Except as provided herein, all
terms and conditions of the Agreement and of the other Loan
Documents remain in full force and effect. Furthermore, except
as provided herein, all warranties and representations made in
the Agreement and in the other Loan Documents remain in full
force and effect.
9. Conditions to Effectiveness. This Third Amendment shall not be
effective until each of the following conditions precedent
have been fulfilled to the satisfaction of the Agent and the
Lenders:
(1) This Third Amendment shall have been duly executed
and delivered by the respective parties hereto.
(2) No Suspension Event shall have occurred and be
continuing.
(3) The Borrower shall have provided such additional
instruments and documents to the Agent as the Agent
and the Agent's counsel may have reasonably
requested.
The Agent shall promptly notify the Borrowers when such
conditions are satisfied.
10. Miscellaneous.
(a) This Third Amendment may be executed in several
counterparts and by each party on a separate counterpart, each
of which when so executed and delivered shall be an original,
and all of which together shall constitute one instrument.
(b) This Third Amendment expresses the entire
understanding of the parties with respect to the transactions
contemplated hereby. No prior negotiations or discussions
shall limit, modify, or otherwise affect the provisions
hereof.
(c) Any determination that any provision of this
Third Amendment or any application hereof is invalid, illegal
or unenforceable in any respect and in any instance shall not
effect the validity, legality, or enforceability of such
provision in any other instance, or the validity, legality or
enforceability of any other provisions of this Third
Amendment.
3
<PAGE> 4
(d) The Borrower shall pay on demand all costs and
expenses of the Agent, including, without limitation,
reasonable attorneys' fees, in connection with the
preparation, negotiation, execution and delivery of this Third
Amendment.
(e) The Borrower warrants and represents that the
Borrower has consulted with independent legal counsel of the
Borrower's selection in connection with this Third Amendment
and is not relying on any representations or warranties of any
Lender or the Agent or their respective counsel in entering
into this Third Amendment.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to
Loan and Security Agreement to be executed by their duly authorized officers as
a sealed instrument as of the date first above written.
DRUG EMPORIUM, INC.
("Borrower")
By: /s/ Terry L. Moore
---------------------------------
Name: Terry L. Moore
-------------------------------
Title: Chief Financial Officer
------------------------------
BANKBOSTON RETAIL FINANCE INC.
("Agent")
By: /s/ James R. Dore
---------------------------------
Name: James R. Dore
-------------------------------
Title: Vice President
------------------------------
The "LENDERS"
BANKBOSTON RETAIL FINANCE INC.
By: /s/ James R. Dore
---------------------------------
Print Name: James R. Dore
-------------------------
Title: Vice President
------------------------------
4
<PAGE> 5
NATIONAL CITY COMMERCIAL FINANCE, INC.
By: /s/ Robert G. Dracon, Jr.
---------------------------------
Print Name: Robert G. Dracon, Jr.
-------------------------
Title: Vice President
------------------------------
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ M. Martha Gaskin
--------------------------------
Print Name: M. Martha Gaskin
------------------------
Title: Vice President
-----------------------------
LASALLE BUSINESS CREDIT, INC.
By: /s/ Ellen T. Cook
--------------------------------
Print Name: Ellen T. Cook
------------------------
Title: Vice President
-----------------------------
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-START> FEB-28-1999
<PERIOD-END> NOV-27-1999
<CASH> 1,479
<SECURITIES> 0
<RECEIVABLES> 33,345
<ALLOWANCES> 0
<INVENTORY> 186,985
<CURRENT-ASSETS> 224,655
<PP&E> 88,409
<DEPRECIATION> 53,747
<TOTAL-ASSETS> 274,916
<CURRENT-LIABILITIES> 172,745
<BONDS> 51,462
0
0
<COMMON> 1,320
<OTHER-SE> 45,739
<TOTAL-LIABILITY-AND-EQUITY> 274,916
<SALES> 667,906
<TOTAL-REVENUES> 667,906
<CGS> 524,848
<TOTAL-COSTS> 150,705
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,029
<INCOME-PRETAX> (13,676)
<INCOME-TAX> (5,469)
<INCOME-CONTINUING> (8,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,207)
<EPS-BASIC> (.62)
<EPS-DILUTED> (.62)
</TABLE>
