<PAGE>
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 April 30, 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 June 8, 1994
---------------------------- ------------------------------
Common Stock, $.01 par value 16,331,543
Total pages: 12
Index to exhibits: 11
1
<PAGE>
<PAGE>
ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1994 and July 31, 1993 3
Condensed Consolidated Statements of Operation -
Three and Nine Months ended April 30, 1994
and 1993 4
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended April 30, 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
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
<PAGE>
<TABLE>
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars In Thousands)
April 30, July 31,
ASSETS 1994 1993
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 34,755 $ 41,392
Short-term investments 2,900 3,475
Accounts receivable 13,380 8,313
Inventory 79,300 70,341
Deferred taxes 5,192 8,424
Prepaid expenses 2,252 1,882
-------- --------
Total current assets 137,779 133,827
-------- --------
Property and equipment:
Land and land improvements 10,460 8,937
Buildings 14,259 14,194
Furniture, fixtures and equipment 49,766 47,207
Leasehold improvements 30,684 27,982
Less accumulated depreciation (38,586) (33,095)
--------- ---------
66,583 65,225
-------- --------
Intangible assets 22,334 16,527
-------- --------
$226,696 $215,579
======== ========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,355 $ 1,339
Accounts payable 46,382 41,561
Liability for third-party
settlements and related costs 17,505 16,000
Accrued rent 4,547 3,795
Accrued compensation and benefits 4,192 3,461
Income tax payable 1,038 3,627
Accrued expenses 1,776 1,437
-------- --------
Total current liabilities 76,795 71,220
-------- --------
Notes payable, net of current portion 16,965 18,151
Deferred income tax 6,904 7,008
Minority interest in subsidiaries 682 727
-------- --------
24,551 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; 16,312,893 and 16,242,873
issued and outstanding, respectively 163 162
Additional paid-in capital 46,250 45,463
Retained earnings 78,937 72,848
-------- --------
125,350 118,473
-------- --------
$226,696 $215,579
======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
(Amounts In Thousands, Except ------------------------ -------------------------
Per Share Data)
1994 1993 1994 1993
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $155,629 $133,572 $459,029 $398,233
Costs and expenses:
Cost of sales 114,281 97,625 337,038 291,108
Selling, general and
administrative 34,194 29,892 98,515 87,476
Provision for third-party settlement 7,000 - 7,000 -
-------- -------- -------- --------
Income from operations 154 6,055 16,476 19,649
Interest expense (476) (400) (1,365) (1,319)
Interest income 232 203 763 671
-------- -------- -------- -------
Income (loss) before income tax (90) 5,858 15,874 19,001
Provision for income tax 1,533 1,980 7,019 6,080
-------- -------- -------- -------
Net income (loss) $ (1,623) $ 3,878 $ 8,855 $ 12,921
========= ======== ======== ========
Earnings (loss) per common share ($.10) $ .24 $ .54 $ .80
========= ======== ======== ========
Weighted average number of
common shares outstanding 16,307 16,227 16,268 16,210
======== ======== ======== ========
Cash dividend per common share $ .06 $ .05 $.170 $ .135
======== ======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
(Dollars In Thousands) April 30,
--------------------
1994 1993
------- -------
<S> <C> <C>
Operating activities:
Net income $ 8,855 $12,921
Adjustments to reconcile to net cash
provided by operations:
Depreciation 6,677 6,098
Amortization 2,827 2,111
Changes in operating assets and liabilities:
Accounts receivable (5,067) 3,147
Inventory (8,959) (6,464)
Prepaid expenses (370) (519)
Accounts payable 4,821 8,267
Third-party settlements 1,505 -
Accrued expenses 1,822 978
Income tax payable (2,589) (360)
Deferred income tax 3,128 165
------- -------
Net cash provided by operations 12,650 26,344
------- -------
Investing activities:
Purchase of property and equipment, net (8,035) (10,116)
Purchase of intangible assets (8,678) (3,347)
Proceeds from (purchase of) short-term investments 575 (4,320)
------- --------
Net cash used in investing activities (16,138) (17,783)
-------- --------
Financing activities:
Principal payments on debt (1,170) (21,307)
Dividends paid (2,766) (2,189)
Proceeds from borrowings - 6,450
Proceeds from exercise of stock options 787 616
------- -------
Net cash used in financing activities (3,149) (16,430)
------- --------
Net decrease in cash and cash equivalents (6,637) (7,869)
Cash and cash equivalents at beginning of period 41,392 47,755
------- -------
Cash and cash equivalents at end of period $34,755 $39,886
======= =======
Cash paid for income tax $ 6,124 $ 6,073
======= =======
Cash paid for interest $ 1,548 $ 1,524
======= =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
</TABLE>
5
<PAGE>
<PAGE>
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, necessary
for a fair presentation of financial position, results of operations
and cash flows at April 30, 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, which is adjusted for the
results of physical inventories when taken.
3. Legal Proceedings
The Company entered into a settlement, dated June 7, 1994, with
the United States and the State of Michigan resolving claims under the
Federal False Claims Act and other statutes arising out of the
Company's alleged overstatement of drug acquisition costs in its
billings to certain third-party providers during the period from 1988
to the present. In connection with the settlement, the Company
agreed, without admitting any fault, to pay $7,000,000 and to modify
its drug acquisition cost formula for Medicaid reimbursement claims.
6
<PAGE>
<PAGE>
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 increased by 16.5% and 15.3% for the three and nine
months ended April 30, 1994, respectively, over the comparable periods
of the prior year. The increases were primarily attributable to the
opening of new drugstores and increases of 6.8% and 7.7% in comparable
store sales (sales by stores in operation for at least 12 months) for
the three and nine months ended April 30, 1994, respectively.
Comparable store sales for the quarter were negatively impacted by
inclement weather experienced throughout much of February 1994. As of
April 30, 1994 the Company operated 153 stores, compared to 134 stores
as of April 30, 1993.
Pharmacy sales represented 50.1 percent of total sales for the
third quarter of 1994 and 48.8 percent of total sales for the first
nine months of 1994. Comparable store pharmacy sales increased 10.2
percent for the quarter and 12.4 percent for the first nine months of
1994.
Cost of Sales
-------------
Cost of sales represented 73.4% of net sales for both the three
and nine months ended April 30, 1994 compared to 73.1% for both
periods of the prior year. The increase in the 1994 cost percentages
reflected rising pharmaceutical product costs and the resulting gross
margin percentage pressure due to the reimbursement practices of the
Company's third-party providers. Reimbursement from third-party
providers generally consists of an amount to reimburse the Company for
product costs for the prescription drugs dispensed, plus a dispensing
fee, which represents compensation to the Company for the services it
renders. As drug costs increase, or new drug products having a higher
cost are sold, the gross margin percentage for pharmaceutical sales
will decline, because the fixed dispensing fee remains the same
pursuant to the applicable third-party program.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative expense (SG&A) as a
percentage of net sales was 22.0% and 21.5% for the three and nine
months ended April 30, 1994, respectively, compared to 22.4% and 22.0%
for the comparable periods of the prior year. The decrease in the
percentages was due primarily to the distribution of the Company's
fixed costs over a larger sales base and the Company's cost
containment efforts. Also contributing to the decrease between the
comparable nine month periods was the inclusion of a one-time charge
of $1,025,000, relating to the resolution of a lease dispute, which
occurred in the second quarter of 1993.
7
<PAGE>
<PAGE>
Provision for Third-Party Settlement and Related Expenses
---------------------------------------------------------
The Company entered into a settlement, dated June 7, 1994, with
the United States and the State of Michigan resolving claims under the
Federal False Claims Act and other statutes arising out of the
Company's alleged overstatement of drug acquisition costs in its
billings to certain third-party providers during the period from 1988
to the present. In connection with the settlement, the Company
agreed, without admitting any fault, to pay $7,000,000 and to modify
its drug acquisition cost formula for Medicaid reimbursement claims.
The Company estimates that had the modified Medicaid reimbursement
formula been applied during the first nine months of 1994, the
Company's net income would have been reduced by approximately
$400,000. The Company believes that such modification will not have a
material adverse effect upon future results of operations.
Provision for Income Tax
------------------------
The provision for income taxes for both the three and nine months
ended April 30, 1994 reflects the Company's preliminary assessment
that the after-tax effect of the Company's settlement with the United
States and the State of Michigan will be approximately $6.1 million.
Excluding the effects of this settlement, the provision for income tax
as a percentage of income before income tax would have been 34.7% and
34.5%, respectively, for the three and nine months ended April 30,
1994, compared to 33.8% and 32.0% for the three and nine months ended
April 30, 1993. In the first quarter of 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." The benefit of adopting this statement for the three
and nine months ended April 30, 1993 was a decrease in the provision
for income tax in the amount of $285,000, resulting in a decrease in
the effective tax rate for that period.
8
<PAGE>
<PAGE>
FINANCIAL CONDITION
Cash flow provided by operations for the nine months ended April
30, 1994 was $12,650,000. These funds, in addition to a portion of
the cash and cash equivalents and short-term investments available at
the beginning of the current fiscal year, were used principally for
acquisitions, payment of dividends and debt retirement, which totaled
$20,649,000 for the period. For the first nine months of the current
fiscal year, total net use of cash and cash equivalents was
$6,637,000, including payment of one-third of the Company's $15
million settlement with Blue Cross of Michigan. The remainder of the
settlement will be paid within the next six months. In addition,
during the fourth quarter of fiscal 1994 the Company will pay
$7,000,000 in connection with the Company's settlement with of the
United States and the State of Michigan. See Note 3 of Notes to
Condensed Consolidated Financial Statements.
From the beginning of the current fiscal year through June 6,
1994, 16 new stores have been opened or acquired, including 10
acquired from a drugstore chain in January 1994. Of the acquired
stores, one has been consolidated with the operations of an existing
Company drugstore, a second will be consolidated during the fourth
quarter of 1994 and the Company is evaluating the possibility of
consolidating one or more others. During the third quarter of 1994,
the Company also sold the prescription files of an underperforming
drugstore and closed the store. The Company expects to open or
acquire two additional stores during the remainder of the current
fiscal year.
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 the Company's needs during the current fiscal year.
9
<PAGE>
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company entered into a settlement, dated June 7, 1994, with
the United States and the State of Michigan resolving claims under the
Federal False Claims Act and other statutes arising out of the
Company's alleged overstatement of drug acquisition costs in its
billings to certain third-party providers during the period from 1988
to the present. In connection with the settlement, the Company
agreed, without admitting any fault, to pay $7,000,000 and to modify
its drug acquisition cost formula for Medicaid reimbursement claims.
In connection with the previously reported investigation by the
Securities and Exchange Commission, a formal order of investigation has
been issued and the Company is in the process of complying with a request
for documentation.
10
<PAGE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
11.1 Computation of Earnings Per Share Page 12
(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: June 9, 1994 /s/ Gilbert C. Gerhard
-------------------- ----------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
11
<PAGE>
<TABLE>
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
(In Thousands) April 30, April 30,
------------------ ------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
A. Net (Loss) Income (a) $(1,623) $ 3,878 $ 8,855 $12,921
======== ======= ======= =======
Weighted average number of
common shares outstanding (a) 16,307 16,227 16,268 16,210
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 117 185 135 208
------- ------- ------- -------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 16,424 16,412 16,403 16,418
======= ======= ======= =======
Weighted average number of common
shares outstanding (a) 16,307 16,227 16,268 16,210
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 115 185 133 208
------- ------- ------- -------
C. Common shares,
assuming full
dilution 16,422 16,412 16,401 16,418
======= ======= ======= =======
Primary earnings per
share A/B $ (.10) $ .24 $ .54 $ .79
======== ======= ======= =======
Fully diluted earnings
per share A/C $ (.10) $ .24 $ .54 $ .79
======== ======= ======= =======
<FN>
(a) These amounts agree with the related amounts in the Condensed Consolidated
Statements of Operations.
</TABLE>
12
