<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14491
ARBOR DRUGS, INC.
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(Exact name of registrant as specified in its charter)
Michigan 38-2054345
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3331 West Big Beaver, Troy, Michigan 48084
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 643-9420
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
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. (X) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of October 20, 1995, was $433,711,740.
The number of outstanding shares of the registrant's common stock as of
October 20, 1995 was 24,783,528.
Documents Incorporated by Reference
Certain portions of the registrant's definitive proxy statment pursuant to
Regulation 14A of the Securities Exchange Act of 1934 for the 1995 Annual
Meeting of Shareholders are incorporated by reference in Part III of this Form
10-K.
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PART I
Item 1. Business
General
Arbor Drugs, Inc. (the "Company") is the largest Michigan-based
drugstore chain and the second largest drugstore chain operating in Michigan in
terms of total revenues. As of July 31, 1995, the Company had 167 stores
located primarily in southeastern Michigan.
Unless the context otherwise requires, references to the "Company"
include the Company's consolidated subsidiaries. References to a fiscal year
are to the twelve months ended July 31.
Products
The Company's drugstores sell four principal categories of products:
prescription drugs, health and beauty aids (including proprietary drugs and
cosmetics), photofinishing and film and general merchandise. General
merchandise includes seasonal and promotional goods, greeting cards,
convenience foods and alcoholic and nonalcoholic beverages. In fiscal 1995,
prescription drugs accounted for approximately 49.8 percent, health and beauty
aids for approximately 21.9 percent, photofinishing and film for approximately
4.8 percent and general merchandise for approximately 23.5 percent of the
Company's net sales. Contributions to net sales are not indicative of
contributions to income from operations because gross margins vary among
product categories and products within each category.
The Company's business normally generates somewhat higher revenues
during its second and fourth fiscal quarters (the Christmas and summer
seasons). The Company believes that these higher revenues, in combination
with the fixed nature of certain administrative and store operating costs and
seasonal changes in product mix, result in higher operating income for these
periods.
Merchandising and Marketing
The Company's merchandising strategy is to offer a broad selection
of traditional drugstore items, including both nationally advertised and
private label brand products. Substantially all products are offered at
competitive prices. The Company emphasizes value and customer service in
attractive, conveniently located drugstores. It uses color, signs, packaging
and other merchandising aids to reinforce its name and low prices, and to
showcase its products.
The pharmacy department in each drugstore carries a complete line of
both brand name and generic drugs. The Company has been expanding its
prescription drug business by promoting the use of less costly generic drugs,
whenever possible, and by entering into arrangements with insurance companies,
health maintenance organizations ("HMOs") and other health care groups for the
sale of prescription drugs under third- party reimbursement programs. See
"Significant Customers" below.
As part of the Company's merchandising of pharmaceutical products,
each pharmacy department utilizes Arbortech Plus SM, a computerized
pharmacy system. Arbortech PlusSM enables the Company's pharmacists to recall
a customer's pharmacy history, with a view to identifying possible allergies,
drug
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interactions or therapeutic duplication, and to provide customers with a
complete record of medication dispensed. This system affords each of the
Company's drugstores access to this information, thus enabling customers to be
served by any store in the chain. Arbortech PlusSM also enables the Company to
identify generic equivalents of brand name drugs, centrally control
prescription prices, increase the speed of processing prescriptions and reduce
the paperwork normally involved in, and thus expedite the collection of amounts
due the Company under, third-party reimbursement programs.
The Company promotes its private label Arbor (TM) brand products and
presently offers approximately 1,000 such products, including a wide variety of
vitamins, products for skin, hair and personal care, health products and
proprietary drugs for colds, allergies and other ailments. Offering private
label products enables the Company to sell products, comparable in quality to
name brand products, at substantially lower prices to its customers, but at
higher gross margins for the Company.
The primary photo processing marketing program used by the Company is
Picture! Picture! (SM), which offers a "two for the price of one"
photo processing service, with guaranteed overnight processing. Additional
programs are Picture! Plus! (SM) and the Picture! Picture! Club (SM), which
offer customers one print plus a free roll of film and prizes for volume
photofinishing. Picture Pronto (SM), is a one-hour photo processing service
offered in 96 stores as of July 31, 1995. The Company intends to offer this
service in most of its existing stores, and all new locations. All photo
processing services are provided by an independent contractor.
The Company advertises extensively, principally through the use of
television, radio, direct mail and advertising circulars.
Expansion Program
As of July 31, 1995, the Company operated 167 drugstores, a net
increase of 13 drugstores from the end of fiscal 1994. During fiscal 1995, the
Company opened 15 drugstores and purchased the prescription files of a number
of independent drugstores. Two stores were closed and consolidated with the
operations of other Arbor Drug stores. Assuming no significant construction
delays, the Company anticipates adding approximately 15 to 20 drugstore
locations in Michigan during fiscal 1996. The Company may also continue to
purchase the prescription files of various independent drugstores, as
opportunities arise.
In addition to adding drugstores in southeastern Michigan, the Company has
expanded, and plans to continue to expand, in other areas of Michigan. The
Company may also expand into contiguous states. The Company's 233,600 square
foot distribution center, opened in February 1988, is expected to serve the
Company's distribution needs for the next year. The Company is studying
methods of improving the efficiency of the distribution center and is
undertaking an expansion project which adds approximately 231,000 square feet
to the existing facility. The Company expects that this expanded facility will
accomodate approximately 400 stores.
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Purchasing and Distribution
The Company centrally purchases most of its merchandise directly from
manufacturers, enabling it to benefit from promotional programs and volume
discounts that certain manufacturers offer to retailers. Approximately 80
percent of the merchandise purchased by the Company is received at its
distribution center for redistribution to its drugstores. The balance of
store merchandise is shipped directly to the Company's drugstores by
manufacturers and distributors at prices negotiated at the corporate level.
Significant Customers
In fiscal 1995, 42.7 percent of the Company's net sales (approximately
80% of pharmacy net sales) were attributable to payments by third-party
providers under prescription drug plans. Five of such third-party providers
accounted for approximately one-third of fiscal 1995 net sales and one, Blue
Cross Blue Shield of Michigan, accounted for more than 10 percent of fiscal
1995 net sales (14.4 percent).
The Company participates in the majority of third-party plans offered
to employer groups in its primary marketplace, the greater metropolitan Detroit
area. Accordingly, if any employer group were to change its third-party plan,
the Company believes it is likely that it would continue to fill prescriptions
for such group under a different third-party plan. In the event the Company
were unable to service one or more of its principal third-party provider plans,
however, the Company's revenues would be adversely affected.
Competition
The Company's primary competitors are other drugstore chains,
independent drugstore operators, mail order distributors, hospitals, HMOs,
department stores (including discount stores) and supermarkets. Many of the
businesses with which the Company competes are larger and have been in business
longer or have substantially greater financial resources than the Company.
Competition remained keen during fiscal 1995 with the Company
competing on the basis of price, convenience, store design, product selection,
quality and variety. See "Merchandising and Marketing" above.
Significant Proprietary Rights
The Arbor(TM) trade name is considered to be of material importance to
the business of the Company. The Company also holds servicemarks for some of
its photo finishing products and pharmacy systems.
Regulatory Matters and Insurance
All of the Company's pharmacy departments and all pharmacists
employed by the Company are licensed by the Michigan Board of Pharmacy. The
Company's drugstores and its warehouse facility are also registered with the
United States Drug Enforcement Administration and are subject to various
licensing and regulatory requirements. Beer and wine are sold in all of the
Company's drugstores, and liquor is sold in most of the drugstores. The sale
of alcoholic beverages is regulated by the Michigan Liquor Control Commission.
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By virtue of these various license and registration requirements, the Company
is obligated to observe certain rules and regulations. A violation of these
rules and regulations could result in a suspension or revocation of such
licenses or registrations with respect to one or more of the Company's
drugstores or the distribution center.
The Company carries general liability insurance, subject to
self-insured retentions, with respect to druggist, product, premises and
"dram-shop" claims.
Employees
As of July 31, 1995, the Company had approximately 5,700 employees,
approximately 400 of whom were employed in the Company's executive office and
distribution center and the remainder of whom were employed in the Company's
drugstores. A majority of the drugstore employees work on a part-time basis
(fewer than 35 hours per week).
The Company's employees are not represented by unions. The Company
believes that its relations with its employees are good.
Item 2. Properties
As of July 31, 1995, over 90 percent of the Company's 167 drugstores
were leased. Only three of the leases are due to expire within the next five
years. In addition to base rentals, the majority of the Company's store leases
require additional rentals based on a percentage of sales. In most instances,
the leases obligate the Company to pay its pro rata share of common area
maintenance charges, taxes and insurance.
The Company owns its 233,600 square foot distribution center, which is
located in Novi, Michigan. The Company leases its 54,000 square foot executive
offices, which are located in Troy, Michigan.
Item 3. Legal Proceedings
In November 1993 the Securities and Exchange Commission (the "SEC")
issued a formal Order of Private Investigation relating to the Company's
reporting of certain third-party reimbursement practices and a contractual
dispute over these practices with Blue Cross of Michigan (which has been
settled). The Company has complied with the SEC's requests for information
made in November 1993 and October 1994.
The Company is also involved in various routine litigation incidental
to its business, none of which, in the opinion of management, is deemed to be
material.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 10. Directors and Executive Officers of the Registrant
The information regarding executive officers of the Company contained
in Item 10 of this Report as it appears in Part III of this Report is
incorporated herein by reference.
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PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters
The Company's Common Stock is regularly quoted on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) National
Market System under the symbol ARBR. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's
Common Stock and cash dividends paid.
<TABLE>
<CAPTION>
Common Stock Prices*
-------------------- Dividends
Quarter Ended High Low Per Share*
Fiscal 1994 ---- --- ----------
-----------
<S> <C> <C> <C>
October 31 $13.38 $10.38 $.033
January 31 14.00 11.88 .040
April 30 13.50 10.67 .040
July 31 14.00 10.67 .040
Fiscal 1995
-----------
October 31 $14.50 $12.50 $.040
January 31 16.00 13.13 .050
April 30 17.50 14.67 .050
July 31 17.50 15.75 .050
Fiscal 1996
-----------
October 31 (through
October 20) $19.50 $16.75 $.050
</TABLE>
*All data has been restated to give effect to the May 1995 3-for-2 stock
split.
The Company intends to continue to declare quarterly cash dividends on
its Common Stock, subject to the Company's earnings, financial condition,
capital requirements and other such factors as are deemed relevant by the Board
of Directors.
On October 20, 1995, there were approximately 6,200 shareholders of
record of the Company (including individual participants in security position
listings).
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Item 6. Six Year Summary of Selected Financial Data
The following tables set forth selected consolidated financial data for each of
the fiscal years shown.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
(In thousands, except per
share data)
Net Sales $707,150 $618,562 $534,966 $476,848 $405,899 $341,286
Operating costs and expenses:
Cost of sales 521,707 454,207 390,896 346,140 292,433 244,915
Selling, general and
administrative 149,829 132,759 117,337 105,783 91,509 78,134
Provision for third-party
settlement and related expenses - 7,000 16,000 - - -
-------- -------- -------- -------- -------- --------
Income from operations 35,614 24,596 10,733 24,925 21,957 18,237
Interest expense (2,035) (1,667) (1,738) (2,763) (2,878) (2,918)
Interest income 1,359 995 961 1,399 805 1,425
-------- -------- -------- -------- --------- --------
Income before income tax 34,938 23,924 9,956 23,561 19,884 16,744
Provision for income tax 11,871 9,846 3,047 7,787 6,831 5,740
-------- -------- -------- -------- -------- --------
Net Income $ 23,067 $ 14,078 $ 6,909 $ 15,774 $ 13,053 $ 11,004
======== ======== ======== ======== ======== ========
Earnings per common
share (a) (b) $ .94 $ .58 $ .28 $ .65 $ .59 $ .51
======== ======== ======== ======== ======== ========
FINANCIAL POSITION (at fiscal year end)
(In thousands)
Current assets $148,445 $140,597 $133,827 $126,340 $107,604 $ 73,159
Current liabilities 67,059 72,443 71,220 66,477 42,948 36,757
Total assets 246,594 233,660 215,579 200,423 175,673 131,897
Notes payable, net of
current portion 22,260 23,679 18,151 12,986 27,500 28,500
Shareholders' equity 150,716 129,964 118,473 113,874 99,191 62,091
Shareholders' equity per share (a) $ 6.09 $ 5.30 $ 4.86 $ 4.69 $ 4.11 $ 2.89
Dividends per share (a) $ .190 $ .153 $ .123 $ .093 $ .085 $ .072
</TABLE>
(a) Reflects 3-for-2 stock splits effected May 1995, May 1991 and June 1989.
(b) 1994 and 1993 per share amounts include charges for the settlement of
third-party providers' reimbursement claims and related expenses and the
disposition of a lease dispute. Excluding these charges, 1994 and 1993
earnings per common share would have been $ .83 and $ .74, respectively.
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Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations: Fiscal 1995 vs. Fiscal 1994
<TABLE>
<CAPTION>
Components of earnings: Percentage
Percentage Increase
of Fiscal (Decrease)
Fiscal 1995 1995 Net Compared to
(In Millions) Sales Fiscal 1994
------------- ---------- -----------
<S> <C> <C> <C>
Net sales $707.2 100.0% 14.3%
Cost of sales 521.7 73.8 14.9
Selling, general and
administrative expense 149.9 21.2 12.9
------ ------ -----
Income from operations 35.6 5.0 44.8
Interest expense, net of
interest income 0.6 0.1 (14.3)
Income tax 11.9 1.6 21.4
------ ------ -----
Net income $ 23.1 3.3% 63.8%
====== ====== =====
</TABLE>
Net sales reached $707.2 million in fiscal 1995, an increase of 14.3
percent over fiscal 1994 net sales of $618.6 million. The increase reflected
an increase in comparable store sales (sales by stores in operation for at
least 12 months) of 9.0 percent and the sales made by the drugstores opened in
fiscal 1995.
Prescription drug sales accounted for 49.8 percent of net sales in
fiscal 1995, an increase from 49.0 percent in fiscal 1994. The increases in
both absolute amount and relative contribution were primarily attributable to
the larger store base, a greater number of prescriptions filled on a
comparable-store basis and an increase in the average prescription price. The
latter reflected price increases for certain existing brand name drugs and the
introduction of new brand name drugs, offset in part by the lower prices of
generic drugs, which are marketed as the corresponding brand name drugs lose
patent protection.
The net sales attributable to each of the Company's three other
principal product categories increased in absolute terms as a result of the
larger store base and increased comparable store sales. The health and beauty
aids category increased its contribution to net sales (from 21.6% in fiscal
1994 to 21.9% in fiscal 1995). Photofinishing and film increased as a percent
of net sales, from 4.6% in 1994 to 4.8% in 1995 due to new product
introductions. The percentage of net sales attributable to the general
merchandise category declined (from 24.8% in fiscal 1994 to 23.5% in fiscal
1995); however, net sales attributable to the general merchandise category
continues to increase in absolute terms.
The Company's gross margin declined from 26.6 percent in fiscal 1994
to 26.2 percent in fiscal 1995 primarily due to the effect of rising
pharmaceutical product costs and gross margin percentage pressure due to the
reimbursement practices of the Company's third-party providers. Third-party
providers, which accounted for approximately 80 percent of the Company's
prescription drug sales in fiscal 1995, generally pay the Company an amount
determined by formula to reimburse it for the cost of the prescription drugs
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dispensed plus a fixed dispensing fee to compensate it for the 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 ("SG&A") expenses decreased as a
percentage of net sales to 21.2 percent in fiscal 1995 from 21.5 percent in
fiscal 1994. The decrease was primarily attributable to the Company's efforts
to control expenses and by the higher level of net sales.
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.
The Company's effective tax rate (the provision for income tax as a
percentage of income before income tax) decreased to 34.0 percent in fiscal
1995 from 41.2 percent in fiscal 1994. The decrease reflects the Company's
preliminary assessment for the 1994 provision that the after-tax effect of the
1994 settlement, referred to above, would be approximately $6.1 million.
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Results of Operations: Fiscal 1994 vs. Fiscal 1993
Components of earnings:
Percentage
<TABLE>
<CAPTION>
Percentage Increase
of Fiscal (Decrease)
Fiscal 1994 1994 Net Compared to
(In Millions) Sales Fiscal 1993
------------- ---------- -----------
<S> <C> <C> <C>
Net sales $618.6 100.0% 15.6%
Cost of sales 454.2 73.4 16.2
Selling, general and
administrative expense 132.8 21.5 13.2
Provision for third-party
settlement and related
expenses 7.0 1.1 (56.3)
------ ------ ------
Income from operations 24.6 4.0 129.2
Interest expense, net of
interest income 0.7 0.1 (12.5)
Income tax 9.8 1.6 223.1
------ ------ -----
Net income $ 14.1 2.3% 103.8%
====== ====== ======
</TABLE>
Net sales reached $618.6 million in fiscal 1994, an increase of 15.6
percent over fiscal 1993 net sales of $535.0 million. The increase reflected
an increase in comparable store sales (sales by stores in operation for at
least 12 months) of 7.7 percent and the sales made by the drugstores opened or
acquired in fiscal 1994.
Prescription drug sales accounted for 49.0 percent of net sales in
fiscal 1994, an increase from 47.5 percent in fiscal 1993. The increases in
both absolute amount and relative contribution were primarily attributable to
the larger store base, a greater number of prescriptions filled on a
comparable-store basis and an increase in the average prescription price. The
latter reflected price increases for certain existing brand name drugs and the
introduction of new brand name drugs, offset in part by the lower prices of
generic drugs, which are marketed as the corresponding brand name drugs lose
patent protection.
The net sales attributable to each of the Company's three other
principal product categories increased in absolute terms as a result of the
larger store base and increased comparable store sales. The health and beauty
aids category also increased its contribution to net sales (from 20.9% in
fiscal 1993 to 21.6% in fiscal 1994). The percentage of net sales attributable
to the general merchandise and photofinishing and film categories declined
slightly (from 26.9% and 4.7%, respectively, in fiscal 1993 to 24.8% and 4.6%,
respectively, in fiscal 1994).
While net sales attributable to the general merchandise and
photofinishing and film categories continues to increase in absolute terms, as
a percentage of total sales, these categories declined slightly owing to
greater growth in the prescription drug sales category.
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The Company's gross margin declined from 26.9 percent in fiscal 1993
to 26.6 percent in fiscal 1994 primarily due to the effect of increased
pharmaceutical costs. Third-party providers, which accounted for approximately
77 percent of the Company's prescription drug sales in fiscal 1994, 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 to compensate it
for the 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. Until recently, prescription
drug prices have increased at a rate far in excess of the national Consumer
Price Index. This rate of increase has lessened; however, 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.
As a result of the Company's settlements during fiscal 1994, the
Company operated during much of the fiscal year under new reimbursement
formulas for Blue Cross Blue Shield of Michigan plans and the Medicaid Program.
In the aggregate, the effect of these changes on the Company's after-tax
profits in fiscal 1994 was not significant. Both Blue Cross Blue Shield of
Michigan and the State of Michigan, which administers the Medicaid Program,
have announced that they intend to change their reimbursement formulas for all
participating pharmacies.
SG&A expense decreased as a percentage of net sales to 21.5 percent in
fiscal 1994 from 21.9 percent in fiscal 1993. The decrease was primarily
attributable to the Company's efforts to control expenses and by the higher
level of net sales.
The Company's provision for third-party settlement and related
expenses consisted of $7 million paid to the United States and the State of
Michigan in the fourth quarter of fiscal 1994 to settle certain governmental
claims related to the Company's reimbursement practices.
The Company's effective tax rate (the provision for income tax as a
percentage of income before income tax) increased to 41.2 percent in fiscal
1994 from 30.6 percent in fiscal 1993. The increase reflects the Company's
preliminary assessment that the after-tax effect of the settlement referred to
above will be approximately $6.1 million.
Liquidity and Capital Resources
Net cash provided by operations during fiscal 1995 was $26.6 million.
Cash was principally used for capital expenditures and acquisitions ($20.6
million), cash dividends ($4.7 million) and principal payments on debt ($1.4
million). These activities resulted in a net cash increase of $3.4 million.
The Company's capital expenditures in fiscal 1995 were made primarily
to expand the Company's store base and remodel existing stores. In addition,
the Company continued to invest in various retailing systems, such as its
pharmacy (Arbortech PlusSM) and point-of-sale computer systems. The Company
anticipates fiscal 1996 capital expenditures of approximately $22 million for
these purposes. Additonally, the Company plans to expend approximately $8
million for the expansion of its warehouse and distribution center.
During fiscal 1995, the Company added 15 drugstores through opening
new locations. The Company consolidated two sites with other locations during
the year. The Company also acquired the prescription files of various
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independent drugstores. The Company's current expansion plan contemplates
adding approximately 20 new Arbor drugstores in fiscal 1996 through leasing new
sites, developing new sites and if suitable opportunities arise, acquisitions.
Four drugstores have been opened in fiscal 1996 to date.
The Company believes that existing cash, cash equivalents and
short-term investments, cash provided from future 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 1996. As of July 31, 1995, the Company had outstanding borrowings
against its line of credit aggregating $1.5 million.
Health Care Reform Proposals
The Company's revenues from its pharmacy operations may be affected by
various health care reform initiatives that are being considered by Congress
and the State of Michigan. It is uncertain whether or when any such
legislative initiatives will be enacted and, if implemented, the effect such
legislation will have on the Company's results of operations or financial
condition.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this Item
are included in the Consolidated Financial Statements set forth on pages F-1
through F-13, attached hereto and found immediately following the signature
page of this Report.
Item 9. Disagreements on Accounting and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eugene Applebaum 58 Chairman of the Board,
President and Chief Executive Officer
Markus M. Ernst 58 Executive Vice President,
Chief Operating Officer and Director
Gilbert C. Gerhard 53 Senior Vice President-Finance and Administration,
Chief Financial Officer, Secretary,
Treasurer and Director
Donald M. Stutrud 47 Senior Vice President-Store Operations
Eric B. Bolokofsky 43 Senior Vice President-Merchandising
Dennis J. Wozniak 39 Senior Vice President-Purchasing and Marketing
</TABLE>
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<TABLE>
<S> <C> <C>
Robert R. Beale 57 Vice President-Real Estate
</TABLE>
Mr. Applebaum is a founder of the Company and has been the President
and a Director of the Company and its predecessors since 1963. In January
1985, Mr. Applebaum was elected Chairman of the Board and Chief Executive
Officer. Mr. Applebaum has been a licensed pharmacist in the State of Michigan
since 1960.
Mr. Ernst has been Executive Vice President and a Director of the
Company since 1974, having served as a director and executive officer of one of
the Company's predecessors since 1968. Mr. Ernst has also served as Chief
Operating Officer since 1985. Mr. Ernst joined the Company in 1968.
Mr. Gerhard has been Senior Vice President - Finance and
Administration since February 1994. Mr. Gerhard has also served as Chief
Financial Officer, Secretary and Treasurer since 1983 when he joined the
Company. Mr. Gerhard was Vice President-Finance and Administration from 1983
until February 1994.
Mr. Stutrud has been Senior Vice President - Store Operations since
February 1991. Mr. Stutrud served as Vice President - Store Operations from
March 1986 until January 1991. Mr. Stutrud joined the Company in 1971.
Mr. Bolokofsky has been Senior Vice President - Merchandising since
February 1994. Mr. Bolokofsky served as Vice President - Merchandising from
October 1987 until February 1994. Mr. Bolokofsky joined the Company in 1976.
Mr. Wozniak has been Senior Vice President - Purchasing and Marketing
since February 1994. Mr. Wozniak served as Vice President - Purchasing from
October 1987 until February 1994. Mr. Wozniak joined the Company in 1982.
Mr. Beale has been Vice President - Real Estate since March 1986. Mr.
Beale joined the Company in March 1984.
Additional information required by this Item will be contained in the
Proxy Statement for the Annual Meeting of Shareholders (the "1995 Proxy
Statement"), to be held on December 5, 1995, under the captions, "Election of
Directors" and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 1995 Proxy
Statement under the captions, "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Information Concerning
Meetings of the Board of Directors and Board Committees and Director
Compensation," and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the 1995 Proxy
Statement, under the captions, "Election of Directors" and "Beneficial
Ownership of Common Stock," and is incorporated herein by reference.
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Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the 1995 Proxy
Statement under the caption, "Certain Relationships and Related Transactions,"
and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) The following financial statements and financial statement
schedules are filed as part of this Report:
(1) Financial Statements:
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheets -- July 31, 1995
and 1994
Consolidated Statements of Income -- Fiscal Years
ended July 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity --
Fiscal Years ended July 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows -- Fiscal
Years ended July 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required or because the information is included in the consolidated financial
statements or notes thereto.
(3) Executive Compensation Plans and Arrangements
- 1986 Stock Option Plan
- 1996 Stock Option Plan
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by
the Company during the last quarter of the fiscal year ended
July 31, 1995.
(c) Exhibits
3.1 Restated Articles of Incorporation, as amended, filed
as Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 1988, are
incorporated herein by reference.
14
<PAGE> 15
3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's
Form S-1 Registration Statement (Registration No.
33-4378), are incorporated herein by reference.
4.0 Credit Agreement (the "Credit Agreement") dated as of
May 14, 1992 among Arbor Drugs, Inc., NBD Bank, N.A.,
Manufacturers Bank, N.A., Continental Bank N.A., and
NBD Bank, N.A., as Agent, filed as Exhibit 10.5 to
the Registrant's Annual Report on Form 10-K for the
year ended July 31, 1992, is incorporated herein by
reference.
4.0A Letter, dated June 2, 1994, from NBD Bank, N.A. (in
its capacity as a Bank and as Agent), Continental
Bank, N.A. and Comerica Bank to Arbor Drugs, Inc.,
filed as Exhibit 10.3 to the Registrant's
Annual Report on Form 10-K for the year ended July
31, 1994, is incorporated herein by reference.
4.0B First Amendment to Credit Agreement, dated as of
August 29, 1994, among Arbor Drugs, Inc., NBD
Bank, N.A. (in its capacity as a Bank and as Agent),
Continental Bank, N.A. and Comerica Bank, filed as
Exhibit 10.4 to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 1994, is
incorporated herein by reference.
4.1 The Registrant undertakes to furnish to the
Securities and Exchange Commission, upon request, a
copy of all long-term debt instruments not filed
herewith.
10.1 Amended and restated Arbor Drugs, Inc. Stock Option
Plan, dated June 4, 1993, filed as Exhibit 10.1 to
the Registrant's Annual Report on Form 10-K for the
year ended July 31, 1993, is incorporated herein by
reference.
10.2 Arbor Drugs, Inc. 1996 Stock Option Plan, filed as
Annex 1 to the Registrant's Proxy Statement for its
1995 Annual Meeting of Shareholders, is incorporated
herein by reference.
11. Computation of Earnings Per Share.
21. Subsidiaries of The Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., independent
accountants.
27. Financial Data Schedule.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 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, on October 14, 1994.
ARBOR DRUGS, INC.
By: /s/ Eugene Applebaum
--------------------------------------
Eugene Applebaum,
Chairman of the Board, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on October 14, 1994.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Eugene Applebaum
- ------------------------------
Eugene Applebaum Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)
/s/ Markus M. Ernst
- ------------------------------
Markus M. Ernst Executive Vice President, Chief
Operating Officer and Director
/s/ Gilbert C. Gerhard
- ------------------------------
Gilbert C. Gerhard Senior Vice President-Finance and Administration,
Chief Financial Officer,
Secretary, Treasurer and Director
(Principal Financial and Accounting Officer)
/s/ David B. Hermelin
- ------------------------------
David B. Hermelin Director
/s/ Spencer M. Partrich
- ------------------------------
Spencer M. Partrich Director
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
/s/ Laurie M. Shahon
- ------------------------------
Laurie M. Shahon Director
/s/ Samuel Valenti III
- ------------------------------
Samuel Valenti III Director
</TABLE>
17
<PAGE> 18
ARBOR DRUGS, INC. AND SUBSIDIARIES
_____________
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 31, 1995 AND 1994 AND
FINANCIAL STATEMENT SCHEDULES
FOR THE YEARS ENDED JULY 31, 1995, 1994 AND 1993
18
<PAGE> 19
ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
_____________
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets -- July 31, 1995 and 1994 F-3
Consolidated Statements of Income -- Fiscal Years ended
July 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Shareholders' Equity --
Fiscal Years ended July 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows -- Fiscal Years
ended July 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6 - F-9
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts F-12
</TABLE>
All other schedules are omitted because they are not applicable,
not required or because the information is included in the
consolidated financial statements or notes thereto.
19
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of Arbor Drugs, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of Arbor Drugs, Inc. and Subsidiaries listed in the index
on page F-1 of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arbor Drugs, Inc.
and Subsidiaries as of July 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statments
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Detroit, Michigan
September 29, 1995
20
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
Arbor Drugs, Inc. and Subsidiaries
<TABLE>
<CAPTION>
July 31, 1995 1994
- ----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,798 $ 36,420
Short-term investments 170 1,264
Accounts receivable 14,020 12,782
Inventory 89,553 83,398
Prepaid expenses 4,904 6,733
- ----------------------------------------------------------------------------
Total current assets 148,445 140,597
- ----------------------------------------------------------------------------
Property and equipment:
Land and land improvements 14,591 10,477
Buildings 17,433 14,824
Furniture, fixtures and equipment 58,369 51,563
Leasehold improvements 35,695 34,156
Less accumulated depreciation (49,705) (40,451)
- ----------------------------------------------------------------------------
76,383 70,569
- ----------------------------------------------------------------------------
Intangible assets 21,766 22,494
- ----------------------------------------------------------------------------
Total assets $246,594 $233,660
============================================================================
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,529 $ 1,483
Accounts payable 50,341 52,918
Liability for third-party settlement
and related expenses -- 5,000
Accrued rent and other 7,712 7,080
Accrued compensation and benefits 5,144 4,765
Income tax payable 2,333 1,197
- ----------------------------------------------------------------------------
Total current liabilities 67,059 72,443
- ----------------------------------------------------------------------------
Notes payable, net of current portion 22,260 23,679
Deferred income tax 5,938 6,991
Minority interest in subsidiaries 621 583
- ----------------------------------------------------------------------------
28,819 31,253
- ----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value;
2,000,000 shares authorized;
none issued -- --
Common stock: $.01 par value;
40,000,000 shares authorized;
24,765,602 and 24,510,290 issued
and outstanding, respectively 248 163
Additional paid-in capital 48,902 46,621
Retained earnings 101,566 83,180
- ----------------------------------------------------------------------------
150,716 129,964
- ----------------------------------------------------------------------------
Total liabilities & shareholders' equity $246,594 $233,660
============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
Arbor Drugs, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Fiscal Years Ended July 31, 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands, except per share data)
Net sales $707,150 $618,562 $534,966
Costs and expenses:
Cost of sales 521,707 454,207 390,896
Selling, general and administrative 149,829 132,759 117,337
Provision for third-party settlement
and related expenses -- 7,000 16,000
- ------------------------------------------------------------------------------------
Income from operations 35,614 24,596 10,733
Interest expense (2,035) (1,667) (1,738)
Interest income 1,359 995 961
- ------------------------------------------------------------------------------------
Income before income tax 34,938 23,924 9,956
Provision for income tax 11,871 9,846 3,047
- ------------------------------------------------------------------------------------
Net income $ 23,067 $ 14,078 $ 6,909
====================================================================================
Weighted average number of common
shares outstanding (in thousands) 24,646 24,427 24,326
====================================================================================
Earnings per common share $0.94 $0.58 $0.28
====================================================================================
Cash dividend per common share $0.190 $0.153 $0.123
====================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Retained
(In thousands) Shares Amount Capital Earnings TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1992 16,183 $ 162 $44,773 $68,939 $113,874
Net income -- -- -- 6,909 6,909
Cash dividends of $.123
per share -- -- -- (3,000) (3,000)
Exercise of stock options 59 -- 690 -- 690
- ----------------------------------------------------------------------------------------
Balance, July 31, 1993 16,242 162 45,463 72,848 118,473
Net income -- -- -- 14,078 14,078
Cash dividends of $.153
per share -- -- -- (3,746) (3,746)
Exercise of stock options 98 1 1,158 -- 1,159
- ----------------------------------------------------------------------------------------
Balance, July 31, 1994 16,340 163 46,621 83,180 129,964
Net income -- -- -- 23,067 23,067
Cash dividends of $.190
per share -- -- -- (4,681) (4,681)
Exercise of options and
stock purchase plan 179 2 2,364 -- 2,366
Three-for-two stock split 8,247 83 (83) -- --
- ----------------------------------------------------------------------------------------
Balance, July 31, 1995 24,766 $ 248 $48,902 $101,566 $150,716
================================================================= =======================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
22
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
Arbor Drugs, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Fiscal Years Ended July 31, 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Operating activities:
Net income $23,067 $14,078 $ 6,909
Adjustments to reconcile net
cash provided by operations:
Depreciation 10,886 9,027 8,210
Amortization 4,601 3,940 2,916
Deferred income tax (1,053) (17) 615
Changes in operating assets
and liabilities:
Accounts receivable (1,238) (4,469) 4,896
Inventory (6,155) (13,057) (8,102)
Prepaid expenses 1,829 3,573 (7,639)
Accounts payable (2,577) 11,357 4,801
Third-party settlement
and related expenses (5,000) (11,000) 16,000
Accrued expenses 1,049 3,008 1,729
Income tax payable 1,136 (2,430) 2,289
- -----------------------------------------------------------------------------------
Net cash provided
by operations 26,545 14,010 32,624
- -----------------------------------------------------------------------------------
Investing activities:
Purchase of property and
equipment, net (16,700) (14,371) (13,431)
Purchase of intangible assets (3,873) (9,907) (5,330)
Sale or maturity (purchase) of
short-term investments 1,094 2,211 (3,005)
- -----------------------------------------------------------------------------------
Net cash used in
investing activities (19,479) (22,067) (21,766)
- -----------------------------------------------------------------------------------
Financing activities:
Proceeds from borrowings -- 6,900 6,450
Principal payments on debt (1,373) (1,228) (21,361)
Dividends paid (4,681) (3,746) (3,000)
Proceeds from exercise of stock options
and stock purchase plan 2,366 1,159 690
- -----------------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities (3,688) 3,085 (17,221)
- -----------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,378 (4,972) (6,363)
Cash and cash equivalents at
beginning of year 36,420 41,392 47,755
- -----------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $39,798 $36,420 $41,392
===================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Arbor Drugs, Inc. and Subsidiaries
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The preparation of these consolidated financial statements, in order to
be presented in conformity with generally accepted accounting principles,
requires that management use estimates and assumptions regarding events
anticipated and transpired, together with their potential effects upon the
reported amounts of assets and liabilities, as well as the disclosures and
assessments of contingent assets and liabilities, at the date of the financial
statements, and in determining the reported amounts of revenues, costs and
expenses of the reporting periods. Actual results could differ from those
estimates.
BASIS OF OPERATION
The consolidated financial statements include Arbor Drugs, Inc.
("Company") and its subsidiaries, whose primary business activity is the
operation of drugstores, principally in southeastern Michigan. All significant
intercompany transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. Short-term investments include all
liquid investments with a maturity greater than three months and are stated at
cost, which approximates market.
RECEIVABLES
The Company has contractual arrangements with third-party providers of
insurance, enabling the Company to obtain reimbursement from these carriers for
prescription services performed by the Company for benefit of its customers.
Consequently, significant revenue and accounts receivable result from these
arrangements.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market assuming a
last-in, first-out cost flow. Had the first-in, first-out method for
determining cost been used, inventories would have been increased by
approximately $22,814,000 and $20,511,000 at July 31, 1995 and 1994,
respectively.
PROPERTY AND EQUIPMENT
All property and equipment are recorded at cost. Maintenance and repair
costs are charged to expense as incurred. Upon retirement or disposal, the
asset cost and related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in the results
of operations for the period.
DEPRECIATION
Depreciation is computed using primarily the straight-line method based
on the following range of estimated useful lives:
<TABLE>
<S> <C>
Buildings . . . . . . 40 years
Furniture, fixtures
and equipment and
land improvements . . 5 to 20 years
Leasehold
improvements . . . . Lesser of lease term or useful lives,
ranging from 5 to 20 years
</TABLE>
F-6
24
<PAGE> 25
INCOME TAX
Deferred tax assets and liabilities are recognized for temporary
differences at the tax rate expected to be in effect when the related asset is
recovered or the related liability is settled.
PREOPENING EXPENSES
Preopening expenses of retail drugstores are charged to income as
incurred.
ADVERTISING
Advertising production costs are expensed the first time the related
advertising takes place. Advertising expense for the years ended July 31, 1995,
1994 and 1993 was approximately $14,774,000, $13,079,000 and $11,984,000 ,
respectively.
2.INTANGIBLE
ASSETS:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
July 31,
- -----------------------------------------------
1995 1994
- -----------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Prescription
customer files $19,767 $19,572
Leaseholds 3,631 3,917
Developed software 4,883 4,630
Other 10,895 10,200
- -----------------------------------------------
39,176 38,319
Less accumulated
amortization 17,410 15,825
- -----------------------------------------------
$21,766 $22,494
===============================================
</TABLE>
Prescription customer files and other intangible assets consist
primarily of amounts, other than leaseholds, allocated upon the purchase of
assets of existing retail operations and are generally amortized over a period
not to exceed 15 years.
Leaseholds represent the amounts paid for, or allocated to, beneficial
lease agreements assumed by the Company upon purchase of assets of existing
retail operations or leases. Amortization is recorded using the straight-line
method over the term of the related lease agreement.
3.NOTES
PAYABLE:
<TABLE>
<CAPTION>
July 31,
- ----------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Mortgage note payable,
interest at 8.75 percent,
monthly interest and
principal installments
of $60,976 through
July 1, 2014 $ 6,778 $ 6,900
Senior note, interest at
9.93 percent, semiannual
interest and $500,000
principal payments,
final payment due
October 31, 1997 4,500 5,500
Mortgage note payable,
interest at 9.68 percent,
monthly interest and
principal installments
of $62,298 through
July 1, 2012 6,223 6,361
Line of credit term loan,
interest at 7.16 percent,
quarterly interest
only payments,due
December 15, 1997 1,500 1,500
Mortgage note payable,
interest at 8.49 percent,
monthly interest and
principal installments
of $42,926 through
December 1, 2012 4,677 4,790
Other borrowings 111 111
- ------------------------------------------------------------------
23,789 25,162
Less current portion 1,529 1,483
- ------------------------------------------------------------------
$22,260 $23,679
==================================================================
</TABLE>
As of July 31, 1995, the Company had a $50 million line of credit with
an outstanding balance of $1.5 million. This credit facility expires November
30, 2000.
Maturities of notes payable for the next five fiscal years are
approximately as follows:
<TABLE>
<S> <C>
1996 $1,419,000
1997 $1,458,000
1998 $4,501,000
1999 $ 548,000
2000 $ 600,000
</TABLE>
F-7
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Arbor Drugs, Inc. and Subsidiaries
The senior note, term loan and revolving credit agreement contain
certain covenants, the most restrictive of which require the Company to
maintain minimum current, debt service and equity ratios and maintain a minimum
amount of net worth. Certain property has been pledged as collateral under
terms of the mortgage notes payable.
Interest costs capitalized for the years ended July 31, 1995, 1994 and
1993 were approximately $328,000, $264,000 and $270,000, respectively.
Cash paid for interest, net of capitalized interest, was approximately
$2,232,000, $1,700,000 and $1,588,000 for the years ended July 31, 1995, 1994
and 1993, respectively.
4. RENTAL EXPENSE AND
LEASE COMMITMENTS:
The Company leases certain facilities, transportation, data processing
and photo development equipment under operating lease agreements expiring on
various dates through the year 2020. In addition to minimum rentals, certain
lease agreements provide for contingent rental payments based upon attainment
of specified sales volume or increases in the consumer price index. Most leases
contain renewal options for periods ranging from 5 to 30 years. The following
are summaries of rental expense and the future minimum annual rental payments
required under all operating leases:
<TABLE>
<CAPTION>
Year Ended July 31,
- ----------------------------------------------
1995 1994
- ----------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Rental expense:
Minimum rentals $14,848 $14,792
Contingent rentals 1,574 1,567
- ----------------------------------------------
$16,422 $16,359
Minimum annual rentals:
==============================================
Year ending July 31:
1996 $ 17,740
1997 18,335
1998 17,907
1999 17,002
2000 14,577
Remaining lease term 137,565
- ----------------------------------------------
$223,126
==============================================
</TABLE>
Accrued rent of $5,781,000 and $5,146,000 is included in accrued
expenses as of July 31, 1995 and 1994, respectively.
5. EMPLOYEE
RETIREMENT PLANS:
The Company maintains an employee savings plan, pursuant to section
401(k) of the Internal Revenue Code. Eligible participating employees may
contribute up to 15 percent of their salaries, subject to certain limitations,
for investment in either the common stock of the Company or various other
investment options. Contributions by the Company are discretionary.
6. INCOME
TAX:
The provision for federal income tax consists of the following:
<TABLE>
<CAPTION>
Year Ended July 31,
- ---------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Currently payable $10,745 $6,112 $10,084
Deferred 1,126 3,734 (7,037)
- ---------------------------------------------------------------
$11,871 $9,846 $3,047
===============================================================
</TABLE>
The provision for deferred income tax is attributed to the tax effect of
differences caused by the timing of expense and revenue recognition, between
financial statement and tax accounting, for certain transactions, at the tax
rates expected to be in effect when the related asset is recovered or liability
is settled. These differences are primarily attributed to the following:
<TABLE>
<CAPTION>
July 31,
- ----------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Provision for
third-party settlements $ 1,750 $ 3,500
Vendor agreement
discounts 130 437
Depreciation and
amortization 291 17
- ----------------------------------------------------------------
</TABLE>
26
<PAGE> 27
The provision for income tax, as a percentage of income before tax, was
34.0 percent, 41.2 percent and 30.6 percent in 1995, 1994 and 1993,
respectively. These rates differ from the statutory rate due to:
In 1995, income earned on tax-exempt investments reduced the provision
by approximately $300,000.
In 1994, the provision 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. Also, income
earned on tax-exempt investments reduced the provision by approximately
$255,000.
In 1993, the Company's adoption of "Statement of Financial Accounting
Standards No. 109" reduced the tax provision by $285,000, and income earned on
tax-exempt investments reduced the tax provision by approximately $190,000.
Prepaid expenses include the current portion of deferred income taxes
of $2,494,000 and $4,673,000 in 1995 and 1994, respectively.
Cash paid for income taxes was approximately $8,800,000, $8,135,000 and
$6,374,000 in 1995, 1994 and 1993, respectively.
7. STOCK
OPTION PLAN:
Under the Company's Stock Option Plan, certain of the Company's key
employees have been granted nonqualified stock options which allow the employee
to purchase shares of common stock at prices equal to market value at the date
of grant and become exercisable 12 months after grant, on a pro rata basis,
over a five-year period. There were approximately 868,000 shares exercisable at
July 31, 1995.
The Company is currently authorized to grant options to purchase up to
an aggregate of 3,806,250 shares of its common stock, of which 3,675,151
shares have been granted and 2,865,345 shares were outstanding as of July 31,
1995.
Stock option transactions are summarized as follows.
<TABLE>
<CAPTION>
Number of Option
Shares Price Range
- ----------------------------------------------------------------
<S> <C> <C>
Balance, July 31, 1992 1,182,780 $2.67-15.83
Granted 548,625 11.67-13.17
Terminated (23,438) 3.30-15.83
Exercised (89,190) 2.67- 8.67
- ----------------------------------------------------------------
Balance, July 31, 1993 1,618,777 $2.67-15.83
Granted 640,426 10.83-12.50
Terminated (19,500) 8.33-15.83
Exercised (145,980) 2.67-11.67
- ----------------------------------------------------------------
Balance, July 31, 1994 2,093,723 $4.00-15.83
Granted 985,351 13.03-15.17
Terminated (17,445) 8.33-15.83
Exercised (196,284) 4.00-13.17
- ----------------------------------------------------------------
Balance, July 31, 1995 2,865,345 $6.05-15.83
================================================================
</TABLE>
8. QUARTERLY FINANCIAL
SUMMARY (UNAUDITED):
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
- ---------------------------------------------------------------------------------
Fiscal Year Oct. 31, Jan. 31, April 30, July 31,
1995 1994 1995 1995 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $167,340 $185,134 $174,806 $179,870
Gross profit 43,842 48,630 45,793 47,178
Net income 4,709 7,488 5,230 5,640
Earnings
per share $.19 $.30 $.21 $.23
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
- ---------------------------------------------------------------------------------
Fiscal Year Oct. 31, Jan. 31, April 30, July 31,
1994 1993 1994 1994 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $143,804 $159,596 $155,629 $159,533
Gross profit 38,180 42,463 41,348 42,364
Net income
(loss) 4,006 6,474 (1,623)* 5,223
Earnings (loss)
per share $.16 $.27 $(.07)* $.21
=================================================================================
</TABLE>
Amounts may not total due to rounding.
* Results include a third quarter charge in the amount of $7.0 million
(after-tax $6.1 million, or $.25 per share) relating to the settlement of a
third-party provider's reimbursement claim.
27
<PAGE> 28
ARBOR DRUGS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ---------------------- -------- --------
Balance at Charges Charges To Balance
Beginning To Cost/ Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- -------- ---------- ---------- ---------
Year End July 31, 1995:
=======================
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful
Accounts $1,018,510 $ 212,817 - $ 687,937 $ 543,390
Year End July 31, 1994:
=======================
Allowance For Doubtful
Accounts $1,014,652 $ 236,526 - $ 232,668 $1,018,510
Year End July 31, 1993:
=======================
Allowance For Doubtful
Accounts $ 756,765 $ 350,385 - $ 92,498 $1,014,652
</TABLE>
F - 12
28
<PAGE> 29
<TABLE>
<CAPTION>
INDEX TO EXHIBITS Page #
------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as
amended,filed as Exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the year ended
July 31, 1988, are incorporated herein by reference.
3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's
Form S-1 Registration Statement (Registration
No. 33-4378), are incorporated herein by reference.
4.0 Credit Agreement (the "Credit Agreement") dated
as of May 14,1992 among Arbor Drugs, Inc.,
NBD Bank, N.A., Manufacturers Bank, N.A.,
Continental Bank N.A., and NBD Bank, N.A.,
as Agent, filed as Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K for the year ended
July 31, 1992, is incorporated herein by reference.
4.0A Letter, dated June 2, 1994, from NBD Bank, N.A.
(in its capacity as a Bank and as Agent),
Continental Bank, N.A. and Comerica Bank
to Arbor Drugs, Inc., filed as Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the year
ended July 31, 1994, is incorporated herein by reference.
4.0B First Amendment to Credit Agreement, dated as of
August 29, 1994, among Arbor Drugs, Inc.,
NBD Bank, N.A. (in its capacity as a Bank and as Agent),
Continental Bank, N.A. and Comerica Bank, filed as Exhibit
10.4 to the Registrant's Annual Report on Form 10-K for the
year ended July 31, 1994, is incorporated herein by reference.
4.1 The Registrant undertakes to furnish to the
Securities and Exchange Commission, upon request,a
copy of all long-term debt instruments not filed herwith.
10.1 Amended and restated Arbor Drugs, Inc. Stock Option
Plan, dated June 4, 1993, filed as Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year
ended July 31, 1993, is incorporated herein by reference.
10.2 Arbor Drugs, Inc. 1996 Stock Option Plan, filed as Annex 1 to
the Registrant's Proxy Statement for its 1995 Annual Meeting
of Shareholders, is incorporated herein by reference.
11. Computation of Earnings Per Share. 30
21. Subsidiaries of The Registrant. 31
23.1 Consent of Coopers & Lybrand L.L.P, independent 32
accountants.
27. Financial Data Schedule. 33
</TABLE>
29
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Year Ended
(In thousands, except July 31, July 31,
for per share data) ------------------ ---------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
A. Net Income $ 5,640 $ 5,223 $23,067(a) $14,078(a)
======= ======= ======= =======
Weighted average number
of common shares
outstanding 24,746 24,498 24,646(a) 24,427(a)
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 421 165 332 194
------- ------- ------- -------
B. Average number of
common shares and
common equivalent
shares for primary
earnings per share 25,167 24,663 24,978 24,621
------- ------- ------- -------
Weighted average number
of common shares
outstanding 24,746 24,498 24,646(a) 24,427(a)
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 price of the common 440 266 443 273
shares during the period, ------- ------- ------- -------
using the treasury stock method.
C. Average number of common
shares and common equivalent
shares for fully diluted
earnings per share. 25.186 24.764 25.089 24.700
======= ======= ======= =======
Primary earnings per
share A $0.22 $ 0.21 $0.92(b) $0.57
- ======= ======= ======= =======
B
Fully diluted earnings
per share A $0.22 $ 0.21 $0.92(b) $0.57
- ======= ======= ======= =======
C
</TABLE>
(a) These amounts agree with the related amounts in the 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 $.02, but due to rounding, is shown as
presented.
30
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
List of Subsidiary Corporations State Of Incorporation
- ------------------------------- ----------------------
<S> <C>
Arbor Drugs - Civic Incorporated Michigan
A.D.I. Realty, Incorporated Michigan
Richard Investment Company Michigan
E.F. Mile Corporation Michigan
Pharmacy Advisory Company Michigan
</TABLE>
All subsidiaries conduct business using the names above.
31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Arbor Drugs, Inc. on Form S-8 (File Nos. 33-11830, 33-54141, 33-56109,
33-39259, 33-13102) of our report dated September 29, 1995, on our audits of
the consolidated financial statements and financial statement schedules of
Arbor Drugs, Inc. and Subsidiaries as of July 31, 1995 and 1994, and for the
years ended July 31, 1995, 1994 and 1993, which report is included in this
Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
- ---------------------------------
Detroit, Michigan
October 23, 1995
32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 39,798
<SECURITIES> 170
<RECEIVABLES> 14,020
<ALLOWANCES> 0
<INVENTORY> 89,553
<CURRENT-ASSETS> 148,445
<PP&E> 126,088
<DEPRECIATION> 49,705
<TOTAL-ASSETS> 246,594
<CURRENT-LIABILITIES> 67,059
<BONDS> 22,260
<COMMON> 248
0
0
<OTHER-SE> 150,468
<TOTAL-LIABILITY-AND-EQUITY> 246,594
<SALES> 707,150
<TOTAL-REVENUES> 707,150
<CGS> 521,707
<TOTAL-COSTS> 521,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,035
<INCOME-PRETAX> 34,938
<INCOME-TAX> 11,871
<INCOME-CONTINUING> 23,067
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,067
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
</TABLE>
