<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended October 31, 1994 Commission File Number 0-14491
ARBOR DRUGS, INC.
(Exact name of registrant as specified in its charter)
State of Michigan 38-2054345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3331 West Big Beaver, Troy, Michigan 48084
(Address of principal executive offices) Zip Code
810-643-9420
(Registrant's telephone number, including area code)
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 latest practicable date.
Class Outstanding at December 1, 1994
Common Stock, $.01 par value 16,364,928
1
<PAGE> 2
ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1994 and July 31, 1994 3
Condensed Consolidated Statements of Income -
Three Months ended October 31, 1994
and 1993 4
Condensed Consolidated Statements of Cash Flows
- Three Months Ended October 31, 1994 and 1993 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
2
<PAGE> 3
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
October 31, July 31,
ASSETS 1994 1994
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,487 $ 36,420
Short-term investments 1,860 1,264
Accounts receivable 15,958 12,782
Inventory 94,132 83,398
Deferred taxes 4,341 4,673
Prepaid expenses 2,179 2,060
--------- ---------
Total current assets 146,957 140,597
--------- ---------
Property and equipment:
Land and land improvements 12,411 10,477
Buildings 14,877 14,824
Furniture, fixtures and equipment 53,932 51,563
Leasehold improvements 32,566 34,156
Less accumulated depreciation (42,886) (40,451)
--------- ---------
70,900 70,569
--------- ---------
Intangible assets 22,836 22,494
--------- ---------
$240,693 $233,660
======== ========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,518 $ 1,483
Accounts payable 59,603 52,918
Liability for third-party settlement
and related expenses -- 5,000
Accrued rent 5,540 5,146
Accrued expenses 2,063 1,934
Accrued compensation and benefits 4,175 4,765
Income tax payable 3,281 1,197
--------- ---------
Total current liabilities 76,180 72,443
--------- ---------
Notes payable, net of current portion 23,061 23,679
Deferred income tax 7,001 6,991
Minority interest in subsidiaries 578 583
--------- ---------
30,640 31,253
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value; 2,000,000
share authorized; none issued -- --
Common stock: $.01 par value; 40,000,000
shares authorized; 16,355,243 and 16,340,193
issued and outstanding, respectively 164 163
Additional paid-in capital 46,800 46,621
Retained earnings 86,909 83,180
--------- ---------
133,873 129,964
--------- ---------
$240,693 $233,660
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE> 4
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts In Thousands, Except Three Months Ended
Per Share Data) October 31,
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
Net sales $167,340 $143,804
Costs and expenses:
Cost of sales 123,498 105,624
Selling, general and
administrative 36,342 31,884
--------- ---------
Income from operations 7,500 6,296
Interest expense (551) (433)
Interest income 268 271
--------- ---------
Income before income tax 7,217 6,134
Provision for income tax 2,508 2,128
--------- ---------
Net income $ 4,709 $ 4,006
======== ========
Earnings per common share $ .29 $ .25
======== ========
Weighted average number of
common shares outstanding 16,343 16,244
======== ========
Cash dividend per common share $ .06 $ .05
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE> 5
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
(Dollars In Thousands) October 31,
---------------------
1994 1993
-------- -------
<S> <C> <C>
Operating activities:
Net income $ 4,709 $ 4,006
Adjustments to reconcile to net cash
used in operations:
Depreciation 2,610 2,070
Amortization 1,117 887
Changes in operating assets and liabilities:
Accounts receivable (3,176) (2,928)
Inventory (10,734) (5,830)
Prepaid expenses (119) 99
Accounts payable 6,685 6,815
Third-party settlement
and related expenses (5,000) (5,325)
Accrued expenses (72) 1,372
Income tax payable 2,084 (2,809)
Deferred income tax 342 945
------ ------
Net cash used in operations (1,554) (698)
------ ------
Investing activities:
Purchase of property and equipment, net (2,941) (2,839)
Purchase of intangible assets (1,459) (1,322)
Purchase of short-term investments (596) (985)
------ ------
Net cash used in investing activities (4,996) (5,146)
------ ------
Financing activities:
Principal payments on debt (583) (555)
Dividends paid (980) (812)
Proceeds from exercise of stock options 180 8
------ ------
Net cash used in financing activities (1,383) (1,359)
------ ------
Net decrease in cash and cash
equivalents (7,933) (7,203)
Cash and cash equivalents at beginning of period 36,420 41,392
------ ------
Cash and cash equivalents at end of period $28,487 $34,189
====== ======
Cash paid for income tax $ -- $ 3,981
====== ======
Cash paid for interest $ 656 $ 562
====== ======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE> 6
ARBOR DRUGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
and reflect, in the opinion of management, all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flows at October
31, 1994 and for all periods presented. The condensed consolidated
financial statements should be read in conjunction with the annual
consolidated financial statements and notes contained in Arbor's
Annual Report on Form 10-K for the fiscal year ended July 31, 1994.
The results of operations for any interim period should not
necessarily be considered indicative of the results of operations for
the full year.
2. INVENTORY VALUATION
Inventory at interim periods is valued on a last-in, first-out
(LIFO) basis which is determined based upon estimates of gross profit
rates, inflation rates and inventory levels, and is adjusted for the
results of physical inventories when taken.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
References to years are to the Company's fiscal years, which
end July 31.
Net Sales
Net sales reached $167.3 million for the three months ended
October 31, 1994, an increase of 16.4 percent over the three months
ended October 31, 1993. The increase reflects an increase in
comparable store sales (stores open for more than one year) of 8.0
percent and sales made by stores opened in the last 12 months. As of
October 31, 1994, the Company operated 158 stores, compared to 141
stores as of October 31, 1993, and 154 stores as of July 31, 1994.
Prescription drug sales reached $83.1 million for the three
months ended October 31, 1994, an increase of 18.9 percent over the
three months ended October 31, 1993. Prescription drug sales
represented 49.7 percent of total sales for the three months ended
October 31, 1994, compared to 48.6 percent for the three months ended
October 31, 1993. The increases in both absolute amount and relative
contribution reflect an increase of 11.5 percent in comparable store
pharmacy sales (due to increases both in the number of prescriptions
filled and the average prescription price) and the Company's larger
store base.
Cost of Sales
Cost of sales represented 73.8 percent of net sales for the
three months ended October 31, 1994, compared to 73.4 percent for the
three months ended October 31, 1993. The increase reflects rising
pharmaceutical product costs and gross margin percentage pressure due
to the reimbursement practices of the Company's third-party providers.
Third-party providers generally pay the Company an amount determined
by formula to reimburse it for the cost of the prescription drugs
dispensed plus a fixed dispensing fee as compensation for services
rendered. As pharmaceutical costs increase, the gross margin
percentage on such sales decreases because the dispensing fee remains
the same pursuant to the applicable third-party program. Changes in
the reimbursement formulas of
7
<PAGE> 8
the various third-party providers with which the Company has contracts
may also affect the Company's gross margin and operating income.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percentage of net sales amounted to 21.7 percent for the three months
ended October 31, 1994, compared to 22.2 percent for the three months
ended October 31, 1993. The decrease was primarily attributable to
the Company's efforts to control operating expenses and by the higher
level of net sales.
Provision for Income Tax
The provision for income tax as a percentage of income before
income tax was 34.8 percent for the three months ended October 31,
1994, compared to 34.7 percent for the three months ended October 31,
1993. The Company's effective tax rate is lower than the federal
statutory tax rate owing to income earned on tax-exempt investments.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the three months ended October
31, 1994 was $1.6 million. The principal uses were investment in
inventory, net of trade payable increases, in the amount of $4.0
million, to address seasonal needs and to stock new stores, and the
final installment, in the amount of $5.0 million, of the Company's
settlement with Blue Cross Blue Shield of Michigan. In addition,
during the period, $5.0 million of net cash was used for capital
expenditures and other investment activities and $1.4 million of net
cash was used for dividends and debt repayment. For the three months
ended October 31, 1994, total net use of cash and cash equivalents was
$7.9 million.
The Company believes that existing cash, cash equivalents and
short-term investments, cash provided from future
8
<PAGE> 9
operations and funds available under a $50 million line of credit will
support anticipated expansion and working capital needs arising in the
ordinary course of business during fiscal 1995.
During fiscal 1995, the Company plans to open or acquire
approximately 20 stores. As of December 1, 1994, five new stores have
been opened.
9
<PAGE> 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Computation of Earnings Per Share Page 10
(b) Reports on Form 8-K:
NONE
10
<PAGE> 11
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.
ARBOR DRUGS, INC.
(Registrant)
DATED: December 2, 1994 /s/ Gilbert C. Gerhard
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
11
<PAGE> 12
EXHIBIT INDEX
Exhibit No. Description Page No.
- - ----------- ----------- --------
Exhibit 11 Computation of Earnings Per Share
12
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(In Thousands) ------------------
1994 1993
------ ------
<S> <C> <C>
A. Net Income (a) $ 4,709 $ 4,006
======= =======
Weighted average number of
common shares outstanding (a) 16,343 16,244
Effect of the issuance of
stock options and assumed
exercise of stock options
at prices which are lower
than the average market
price of the common shares
during the period, using the
treasury stock method 173 123
------- -------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 16,517 16,367
======= =======
Weighted average number of common
shares outstanding (a) 16,343 16,244
Effect of the issuance of stock
options and assumed exercise of
options at prices which are lower
than the market price of common
stock at end of the period when
such price is higher than average
market 207 177
------- -------
C. Common shares,
assuming full
dilution 16,550 16,421
======= =======
Primary earnings per
share A (b) $ .29 $ .24
B ======= =======
Fully diluted earnings
per share A (b) $ .28 $ .24
C ======= =======
</TABLE>
(a) These amounts agree with the related amounts in the Condensed Consolidated
Statements of Income.
(b) The actual difference between reported earnings per share and both primary
earnings per share and fully diluted earnings, per share is less than $.01,
but due to rounding, is shown as presented.
13
