<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 April 30, 1995 Commission File Number 0-14491
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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
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(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 12, 1995
- ---------------------------- ---------------------------
Common Stock, $.01 par value 24,744,186
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ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1995 and July 31, 1994 3
Condensed Consolidated Statements of Operation-
Three and Nine Months ended April 30, 1995
and 1994 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended April 30, 1995 and 1994 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 9
</TABLE>
2
<PAGE> 3
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
April 30, July 31,
ASSETS 1995 1994
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,239 $ 36,420
Short-term investments 3,590 1,264
Accounts receivable 15,887 12,782
Inventory 88,926 83,398
Deferred taxes 3,573 4,673
Prepaid expenses 2,667 2,060
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Total current assets 151,882 140,597
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Property and equipment:
Land and land improvements 13,759 10,477
Buildings 16,352 14,824
Furniture, fixtures and equipment 56,065 51,563
Leasehold improvements 37,193 34,156
Less accumulated depreciation (47,695) (40,451)
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75,674 70,569
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Other Assets:
Intangible assets 21,759 22,494
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$ 249,315 $233,660
========= =========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,520 $ 1,483
Accounts payable 56,040 52,918
Liability for third-party settlement
and related costs -- 5,000
Accrued rent 6,043 5,146
Accrued expenses 2,584 1,934
Accrued compensation and benefits 4,604 4,765
Income tax payable 3,217 1,197
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Total current liabilities 74,008 72,443
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Notes payable, net of current portion 22,368 23,679
Deferred income tax 6,363 6,991
Minority interest in subsidiaries 604 583
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29,335 31,253
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SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value; 2,000,000
share authorized; none issued -- --
Common stock: $.01 par value; 40,000,000
shares authorized; 24,742,506 and 24,510,289
issued and outstanding, respectively 247 245
Additional paid-in capital 48,560 46,539
Retained earnings 97,165 83,180
--------- ---------
145,972 129,964
--------- ---------
$ 249,315 $ 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 OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts In Thousands, Except Three Months Ended Nine Months Ended
Per Share Data) April 30, April 30,
-------------------------- -----------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 174,806 $ 155,629 $ 527,280 $ 459,029
Costs and expenses:
Cost of sales 129,013 114,281 389,015 337,038
Selling, general and administrative 37,466 34,194 110,855 98,515
Provision for third-party settlement -- 7,000 -- 7,000
--------- --------- --------- ---------
Income from operations 8,327 154 27,410 16,476
Interest expense (694) (476) (1,745) (1,365)
Interest income 379 232 960 763
--------- --------- --------- ---------
Income (loss) before income tax 8,012 (90) 26,625 15,874
--------- --------- --------- ---------
Provision for income tax 2,782 1,533 9,198 7,019
--------- --------- --------- ---------
Net income (loss) $ 5,230 $ (1,623) $ 17,427 $ 8,855
========= ========= ========= =========
Earnings (loss) per common share $ .21 $ ( .07) $ .71 $ .36
========= ========= ========= =========
Weighted average number of
common shares outstanding 24,713 24,460 24,612 24,402
========= ========= ========= =========
Cash dividend per common share $ .05 $ .04 $ .14 $ .11
========= ========= ========= =========
</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>
Nine Months Ended
April 30,
------------------------
<S> <C> <C>
(Dollars In Thousands)
1995 1994
---- ----
Operating activities: $ 17,427 $ 8,855
Net income
Adjustments to reconcile to net cash provided by operations:
Depreciation 8,359 6,677
Amortization 3,459 2,827
Deferred income tax 472 3,128
Changes in operating assets and liabilities:
Accounts receivable (3,105) (5,067)
Inventory (5,528) (8,959)
Prepaid expenses (607) (370)
Accounts payable 3,122 4,821
Third-party settlement
and related expenses (5,000) 1,505
Accrued expenses 1,407 1,822
Income tax payable 2,020 (2,589)
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Net cash provided by operations 22,026 12,650
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Investing activities:
Purchase of property and equipment, net (13,464) (8,035)
Purchase of intangible assets (2,724) (8,678)
Proceeds from (purchase of) short-term investments (2,326) 575
-------- --------
Net cash used in investing activities (18,514) (16,138)
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Financing activities:
Principal payments on debt (1,274) (1,170)
Dividends paid (3,442) (2,766)
Proceeds from stock purchase plan and exercise of stock options 2,023 787
-------- --------
Net cash used in financing activities ( 2,693) (3,149)
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Net increase (decrease) in cash and cash equivalents 819 (6,637)
-------- --------
Cash and cash equivalents at beginning of period 36,420 41,392
-------- --------
Cash and cash equivalents at end of period $ 37,239 $ 34,755
======== ========
Cash paid for income tax $ 6,098 $ 6,124
======== ========
Cash paid for interest $ 2,026 $ 1,548
======== ========
</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, necessary
for a fair presentation of financial position, results of operations
and cash flows at April 30, 1995, 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.
On April 17, 1995, the Board of Directors declared a 3 for 2
stock split which was effected in the form of a dividend paid on May
15, 1995. Accordingly, all per share and stock amounts have been
restated to reflect this dividend.
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.
6
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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 $174.8 million and $527.3 million for the three
and nine months ended April 30, 1995, respectively, an increase of
12.3 percent and 14.9 percent, respectively, over the comparable
periods of the prior year. The increases reflect an increase in
comparable store sales (stores open for more than one year) of 9.1
percent and 9.0 percent for the three and nine months ended April 30,
1995, respectively, and sales made by stores opened in the last 12
months. As of April 30, 1995, the Company operated 160 stores,
compared to 153 stores as of April 30, 1994, and 154 stores as of July
31, 1994.
Prescription drug sales were $88.9 million and $261.2 million for
the three and nine months ended April 30, 1995, respectively, an
increase of 13.7 percent and 16.4 percent, respectively, over the
comparable periods of the prior year. Prescription drug sales
represented 50.8 percent and 49.5 percent of total sales for the three
and nine months ended April 30, 1995, respectively, compared to 50.1
percent and 48.8 percent for the three and nine months ended April 30,
1994. The increases in both absolute amount and relative contribution
reflect both an increase in comparable store pharmacy sales (due to
increases both in the number of prescriptions filled and the average
prescription price) of 11.3 percent and 11.4 percent for the three and
nine months ended April 30, 1995, respectively, and the Company's
larger store base.
COST OF SALES
Cost of sales represented 73.8 percent of net sales for the three
and nine months ended April 30, 1995, respectively, compared to 73.4
percent for the three and nine months ended April 30, 1994.
Generally, the increases reflect 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 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 21.4 percent and 21.0 percent for
the three and nine months ended April 30, 1995, respectively, as
compared to 22.0 percent and 21.5 percent respectively, for the
comparable periods of the prior year. The decrease in the three and
nine month percentages was primarily attributable to the Company's
efforts to control operating expenses and by the higher level of net
sales.
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PROVISION FOR INCOME TAX
The provision for income tax as a percentage of income before
income tax was 34.7 percent and 34.6 percent, respectively, for the
three and nine months ended April 30, 1995, compared to 34.7 percent
and 34.5 percent for the three and nine months ended April 30, 1994,
respectively. The 1994 amounts exclude the effects of the Company's
1994 settlement with the United States and the State of Michigan.
1994 PROVISION FOR THIRD-PARTY SETTLEMENT AND RELATED EXPENSES
The 1994 provision for third party settlement of $7,000,000
reflects the Company's settlement dated June 7, 1994 with the United
States and the State of Michigan to resolve certain claims made by
them.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $.8 million during the nine
months ended April 30, 1995. The Company expended for the 9 months
$19.6 million for dividends and capital expenditures. Cash provided
by operations was $22.0 million for the same period.
The Company believes that existing cash, cash equivalents, cash
provided from 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.
In the third quarter, Arbor opened one new drug store, adding to
the six new stores opened in the first half of this year. For the
fourth quarter, Arbor is planning on adding nine new stores, enabling
us to solidify our position in southeastern Michigan as the drugstore
of choice.
8
<PAGE> 9
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11: Computation of Earnings Per Share Page 10
Exhibit 27: Financial Data Schedule
(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 13, 1995 /s/ Gilbert C. Gerhard
---------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
9
<PAGE> 10
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
10
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In Thousands) April 30, April 30,
---------------------- --------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
A. Net Income (Loss) (a) $ 5,230 $ (1,623) $ 17,427 $ 8,855
======= ======== ======== =======
Weighted average number of
common shares outstanding (a) 24,713 24,460 24,612 24,402
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 375 176 300 203
-------- --------- --------- ---------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 25,088 24,636 24,912 24,605
======= ======== -------- -------
Weighted average number of common
shares outstanding (a) 24,713 24,460 24,612 24,402
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 473 173 450 200
-------- --------- --------- ---------
C. Common shares, assuming
full dilution 25,186 24,633 25.062 24,602
======== ========= ========= =========
Primary earnings
per share A $ .21 $ (.07) $ .70 $ .36
- ======== ========= ========= =========
B
Fully diluted earnings
per share A $ .21 $ (.07) $ .70 $ .36
- ======== ========= ========= =========
C
</TABLE>
(a) These amounts agree with the related amounts in the Condensed
Consolidated Statements of Operations. All share amounts have been
restated to give effect to the stock split declared on April 17, 1995
and to be distributed on May 15, 1995.
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> APR-30-1995
<CASH> 37,239
<SECURITIES> 0
<RECEIVABLES> 15,887
<ALLOWANCES> 0
<INVENTORY> 88,926
<CURRENT-ASSETS> 151,882
<PP&E> 123,369
<DEPRECIATION> 47,659
<TOTAL-ASSETS> 249,315
<CURRENT-LIABILITIES> 74,008
<BONDS> 0
<COMMON> 247
0
0
<OTHER-SE> 145,725
<TOTAL-LIABILITY-AND-EQUITY> 249,315
<SALES> 527,280
<TOTAL-REVENUES> 527,280
<CGS> 389,015
<TOTAL-COSTS> 389,015
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,745
<INCOME-PRETAX> 26,625
<INCOME-TAX> 9,198
<INCOME-CONTINUING> 17,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,427
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
