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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
-------------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1994
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: 0-14491
-------
ARBOR DRUGS, INC.
- ---------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-2054345
- -------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
3331 West Big Beaver
Troy, Michigan 48084
(810) 643-9420
- ---------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
- ---------------------------------------------------------------------------
(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 latest practicable date.
Class Outstanding at February 22, 1994
- ---------------------------- --------------------------------
Common Stock, $.01 par value 16,303,623
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ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1994 and July 31, 1993 3
Condensed Consolidated Statements of Income -
Three and Six Months ended January 31, 1994
and 1993 4
Condensed Consolidated Statements of Cash Flows
- Six Months Ended January 31, 1994 and 1993 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
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<CAPTION>
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars In Thousands)
January 31, July 31,
ASSETS 1994 1993
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,430 $ 41,392
Short-term investments 953 3,475
Accounts receivable 11,817 8,313
Inventory 83,707 70,341
Deferred taxes 6,293 8,424
Prepaid expenses 1,798 1,882
-------- --------
Total current assets 135,998 133,827
-------- --------
Property and equipment:
Land and land improvements 8,761 8,937
Buildings 12,720 14,194
Furniture, fixtures and equipment 49,136 47,207
Leasehold improvements 29,273 27,982
Less accumulated depreciation (36,852) (33,095)
--------- ---------
63,038 65,225
-------- --------
Other assets:
Intangible assets 22,071 16,527
Property held for resale 3,243 -
-------- --------
25,314 16,527
-------- --------
$ 224,350 $215,579
--------- --------
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,350 $ 1,339
Accounts payable 46,758 41,561
Liability for third-party settlement
and related expenses 10,575 16,000
Accrued rent 4,531 3,795
Accrued compensation and benefits 4,205 3,461
Income tax payable 2,473 3,627
Accrued expenses 1,833 1,437
-------- --------
Total current liabilities 71,725 71,220
-------- --------
Notes payable, net of current portion 17,529 18,151
Deferred income tax 6,939 7,008
Minority interest in subsidiaries 659 727
-------- --------
25,127 25,886
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value; 2,000,000
share authorized; none issued - -
Common stock: $.01 par value; 40,000,000
shares authorized; 16,270,323 and 16,242,873
issued and outstanding, respectively 163 162
Additional paid-in capital 45,795 45,463
Retained earnings 81,540 72,848
-------- --------
127,498 118,473
-------- --------
$224,350 $215,579
-------- --------
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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<TABLE>
<CAPTION>
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Amounts In Thousands, Except Three Months Ended Six Months Ended
Per Share Data) January 31, January 31,
------------------ ----------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $159,596 $140,412 $303,400 $264,661
Costs and expenses:
Cost of sales 117,133 102,569 222,757 193,483
Selling, general and
administrative 32,435 29,844 64,320 57,584
-------- -------- -------- --------
Income from operations 10,028 7,999 16,323 13,594
Interest expense (456) (411) (889) (919)
Interest income 260 218 531 468
-------- -------- -------- --------
Income before income tax 9,832 7,806 15,965 13,143
Provision for income tax 3,358 2,605 5,486 4,100
-------- -------- -------- --------
Net income $ 6,474 $ 5,201 $ 10,479 $ 9,043
======== ======== ======== ========
Earnings per common share $ .40 $ .32 $ .64 $ .56
======== ======== ======== ========
Weighted average number of
common shares outstanding 16,255 16,214 16,250 16,201
======== ======== ======== ========
Cash dividend per common share $0.060 $0.050 $0.110 $0.085
======== ======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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<CAPTION>
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
(Dollars In Thousands) January 31,
------------------
1994 1993
------- -------
<S> <C> <C>
Operating activities:
Net income $10,479 $ 9,043
Adjustments to reconcile to net cash
provided by operations:
Depreciation 4,397 4,040
Amortization 1,755 1,377
Changes in operating assets and liabilities:
Accounts receivable (3,504) (3,872)
Inventory (13,366) (5,709)
Prepaid expenses 84 (1,395)
Accounts payable 5,197 2,217
Third-party settlement
and related expenses (5,425) -
Accrued expenses 1,876 1,087
Income tax payable (1,154) (186)
Deferred income tax 2,062 21
------- -------
Net cash provided by operations 2,401 6,623
------- -------
Investing activities:
Purchase of property and equipment, net (2,210) (7,062)
Purchase of intangible assets (7,367) (1,829)
Maturity of short-term investments 2,522 210
Purchase of property held for development or resale (3,243) -
------- -------
Net cash used in investing activities (10,298) (8,681)
------- -------
Financing activities:
Principal payments on debt (611) (20,729)
Dividends paid (1,787) (1,377)
Proceeds from borrowing - 6,450
Proceeds from exercise of stock options 333 394
------- -------
Net cash used in financing activities (2,065) (15,262)
------- -------
Net decrease in cash and cash equivalents (9,962) (17,320)
Cash and cash equivalents at beginning of period 41,392 47,755
------- -------
Cash and cash equivalents at end of period $31,430 $30,435
======= =======
Cash paid for income tax $ 4,376 $ 4,099
======= =======
Cash paid for interest $ 943 $ 888
======= =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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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 January
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, 1993. 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.
3. LEGAL PROCEEDINGS
As discussed in the Company's Annual Report on Form 10-K for
its fiscal year ended July 31, 1993, the Company settled a
contractual dispute with Blue Cross of Michigan relating to its
reimbursement practices, and the United States Attorney for the
Eastern District of Michigan (the "United States Attorney") has
been investigating the Company's third-party reimbursement
practices for possible criminal violations. The Company does not
believe that it has engaged in any conduct that should result in
criminal charges being brought. Although the criminal
investigation has not been discontinued, in February 1994, at the
request of the United States Attorney, the Company agreed that
information that the Company and others had furnished in
connection with the criminal investigation could be used as part
of a review by the Civil Division of the United States Attorney's
office, in
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conjunction with the Department of Health and Human Services
("HHS"), of possible excess Medicaid reimbursement claims by the
Company under the federal False Claims Act. The Company
understands that the review is at an early stage and, to date,
neither the Civil Division nor HHS has asserted any claim against
the Company. The Company believes it is premature to assess the
effect on the Company of these investigations or any claims that
may be asserted as a result thereof.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
---------
Net sales increased by 13.7% and 14.6% for the three
and six months ended January 31, 1994, respectively, over
the comparable periods of the prior year. The increases
were primarily attributable to increases of 7.1% and 8.1% in
comparable store sales (sales by stores in operation for at
least 12 months) for the three and six months ended January
31, 1994, respectively. In addition, sales increased due to
the opening of new drugstores. The Company operated 152
stores at the end of the current fiscal quarter, as compared
to 131 stores at the end of the second quarter of fiscal
1993. Nine of the 21 additional stores were added during
the last two weeks of the quarter ended January 31, 1994.
Cost of Sales
-------------
Cost of sales as a percentage of net sales, for the
three and six months ended January 31, 1994, was 73.4%. The
percentages for the comparable periods of the prior year
were 73.0% and 73.1%, respectively. The increases in the
cost percentages principally reflect rising pharmaceutical
product costs and the resulting gross margin pressure due to
the reimbursement practices of the Company's third party
provider programs and the increase in pharmacy sales as a
percentage of total sales.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative expense as a
percentage of net sales, was 20.3% and 21.2% for the three
and six months ended January 31, 1994, respectively, as
compared to 21.3% and 21.8% for the comparable periods of
the prior year. The decrease in the three and six month
percentages was primarily due to the fact that selling,
general and administrative expense in the quarter ended
January 31, 1993, included a one-time charge of $1,025,000
owing to the disposition of a lease dispute. Additionally,
the percentages declined due to the Company's disciplined
expense control and leveraging provided by higher sales.
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Interest Expense
----------------
Interest expense net of interest income, for the three
and six months ended January 31, 1994 was $196,000 and
$358,000, respectively, as compared to $193,000 and $451,000
in the comparable periods of the prior year. The decrease
in net interest expense for the six months ended January 31,
1994, is due to higher cash balances during that time
period, due primarily, to the repayment of a $20,000,000
note in the second half of fiscal 1993.
Provision for Income Tax
------------------------
The provision for income tax as a percentage of income
before income tax, was 34.2% and 34.4%, respectively, for
the three and six months ended January 31, 1994, as compared
to 33.4% and 31.2% in the three and six months ended January
31, 1993, respectively. The increase in the percentages for
the three and six month periods was due to an increase in
the corporate federal statutory tax rate to 35 percent,
effective January 1, 1993. Additionally, impacting the
increase in the percentage for the six-month period ended
January 31, 1994, was the adoption in the first quarter of
fiscal 1993 of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The benefit of adopting this
statement for the six months ended January 31, 1993, was a
decrease in the provision for income tax in the amount of
$285,000.
FINANCIAL CONDITION
Cash flow provided by operations for the six months
ended January 31, 1994 was $2,401,000. These funds, in
addition to cash, cash equivalents and short-term
investments available at the beginning of the current fiscal
year, were principally used for capital expenditures,
payment of dividends and debt retirement, which totaled
$15,218,000 for the six month period. For the first half of
the current fiscal year, total net use of cash and cash
equivalents was $9,962,000, including the first third of the
Company's $15 million settlement of a contractual dispute
with Blue Cross of Michigan. The remainder of the
settlement will be paid within the next twelve months. For
information with respect to certain related matters, see
Note 3 of Notes to Condensed Consolidated Financial
Statements and Item 1 of this Report.
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During the fiscal year ending July 31, 1994, the
Company plans to open or acquire approximately 18 to 20
stores, including 10 drugstores that were acquired from a
drugstore chain in January 1994. One of the ten stores
acquired from the drugstore chain was consolidated with the
operations of an existing Company drugstore. The Company is
also evaluating the possibility of consolidating one or more
of the remaining acquired stores into existing Arbor
drugstores. As of February 24, 1994, 14 new stores have
been opened or acquired during the current fiscal year.
Construction delays due to unseasonably cold weather in
southeastern Michigan will defer the opening of several
stores from the second half of fiscal 1994 to the first half
of fiscal 1995.
The Company believes that existing cash, cash
equivalents and short-term investments and cash provided
from operations, together with funds available under a $50
million line of credit, will be adequate for anticipated
expansion and working capital needs arising in the ordinary
course of business during the current fiscal year.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As discussed in the Company's Annual Report on Form 10-K for
its fiscal year ended July 31, 1993, the Company settled a
contractual dispute with Blue Cross of Michigan relating to its
reimbursement practices, and the United States Attorney for the
Eastern District of Michigan (the "United States Attorney") has
been investigating the Company's third-party reimbursement
practices for possible criminal violations. The Company does not
believe that it has engaged in any conduct that should result in
criminal charges being brought. Although the criminal
investigation has not been discontinued, in February 1994, at the
request of the United States Attorney, the Company agreed that
information that the Company and others had furnished in
connection with the criminal investigation could be used as part
of a review by the Civil Division of the United States Attorney's
office, in conjunction with the Department of Health and Human
Services ("HHS"), of possible excess Medicaid reimbursement
claims by the Company under the federal False Claims Act. The
Company understands that the review is at an early stage and, to
date, neither the Civil Division nor HHS has asserted any claim
against the Company. The Company has also been advised that the
Securities and Exchange Commission is investigating the Company's
reporting of related matters. The Company believes it is
premature to assess the effect on the Company of these
investigations or any claims that may be asserted as a result
thereof.
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Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was
held on December 7, 1993. At the annual meeting, the
following persons were elected as directors of the Company
and the following votes were cast for or were withheld from
voting with respect to the election of each such person:
Votes
-----------------------
Name For Withheld
-------- --------- --------
Eugene Applebaum 13,438,635 21,742
Markus M. Ernst 13,439,537 20,840
Gilbert C. Gerhard 13,407,532 52,845
David B. Hermelin 13,440,162 20,215
Spencer M. Partrich 13,440,062 20,315
Laurie M. Shahon 13,440,537 19,840
Samuel Valenti III 13,440,587 19,790
There were 750 broker non-votes and no abstentions in
connection with the election of the directors at the annual
meeting.
In addition, at the annual meeting, the adoption of the
Company's Amended and Restated Stock Option Plan, pursuant
to which the number of shares available for grant under the
Plan was increased from 1,537,500 shares to 2,537,500
shares, was approved by the Company's shareholders by a vote
of 10,486,381 shares for the adoption and 1,535,293 shares
against adoption, with 40,926 shares abstaining and
1,397,777 broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 11: Computation of Earnings Per Share
(b) Reports on Form 8-K:
NONE
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: February 24, 1994 /s/ Gilbert C. Gerhard
--------------------- ------------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit 11 Computation of Earnings Per Share
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<CAPTION>
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended
(In Thousands) January 31, January 31,
------------------ --------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
A. Net Income (a) $ 6,474 $ 5,201 $10,479 $ 9,043
======= ======= ======= =======
Weighted average number of
common shares outstanding (a) 16,255 16,214 16,250 16,201
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 167 188 144 193
------- ------- ------- -------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 16,422 16,402 16,394 16,394
======= ======= ======= =======
Weighted average number of common
shares outstanding (a) 16,255 16,214 16,250 16,201
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 169 188 172 193
------- ------- ------- -------
C. Common shares,
assuming full
dilution 16,424 16,402 16,422 16,394
======= ======= ======= =======
Primary earnings per
share A (b) $ .39 $ .32 $ .64 $ .55
- ======= ======= ======= =======
B
Fully diluted earnings
per share A (b) $ .39 $ .32 $ .64 $ .55
- ======= ======= ======= =======
C
<FN>
(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.
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