<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended October 31, 1995
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 November 28, 1995
- ---------------------------- --------------------------------
Common Stock, $.01 par value 24,825,800
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ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1995 and July 31, 1995 3
Condensed Consolidated Statements of Income -
Three Months Ended October 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 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
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ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars In Thousands)
<TABLE>
<CAPTION>
October 31, July 31,
ASSETS 1995 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,941 $ 39,798
Short-term investments 900 170
Accounts receivable 18,031 14,020
Inventory 106,591 89,553
Deferred Taxes 2,429 2,494
Prepaid expenses 2,867 2,410
----------- -----------
Total current assets 161,759 148,445
----------- -----------
Property and equipment:
Land and land improvements 16,321 14,591
Buildings 17,227 17,433
Furniture, fixtures and equipment 60,324 58,369
Leasehold improvements 35,919 35,695
Less accumulated depreciation (51,403) (49,705)
----------- -----------
78,388 76,383
----------- -----------
Other Assets:
Intangible assets 21,374 21,766
----------- -----------
$ 261,521 $ 246,594
=========== ===========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,539 $ 1,529
Accounts payable 57,757 50,341
Accrued rent 6,086 5,781
Accrued expenses 2,957 1,931
Accrued compensation and benefits 5,335 5,144
Income tax payable 4,496 2,333
----------- -----------
Total current liabilities 78,170 67,059
----------- -----------
Notes payable, net of current portion 21,649 22,260
Deferred income tax 5,857 5,938
Minority interest in subsidiaries 642 621
----------- -----------
28,148 28,819
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value; 2,000,000
share authorized; none issued -- --
Common stock: $.01 par value; 40,000,000
shares authorized; 24,806,673 and 24,765,602
issued and outstanding, respectively 248 248
Additional paid-in capital 49,503 48,902
105,452 101,566
Retained earnings ----------- -----------
155,203 150,716
----------- -----------
$ 261,521 $ 246,594
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
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ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts In Thousands, Except Three Months Ended
Per Share Data) October 31,
----------------------------------
1995 1994
----------- ----------
<S> <C> <C>
Net Sales $190,704 $167,340
Costs and expenses:
Cost of sales 141,255 123,498
Selling, general and administrative 41,609 36,342
-------- --------
Income from operations 7,840 7,500
Interest expense (526) (551)
Interest income 456 268
-------- --------
Income before income tax 7,770 7,217
-------- --------
Provision for income tax 2,645 2,508
-------- --------
Net income $ 5,125 $ 4,709
======== ========
Earnings per common share $ .21 $ .19
======== ========
Weighted average number of
common shares outstanding 24,784 24,515
======== ========
Cash dividend per common share $ .05 $ .04
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
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ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
---------------------------------
(Dollars In Thousands)
1995 1994
---------- ----------
<S> <C> <C>
Operating activities: $ 5,125 $ 4,709
Net income
Adjustments to reconcile to net cash provided by operations:
Depreciation 3,029 2,610
Amortization 1,092 1,117
Deferred income tax (16) 342
Changes in operating assets and liabilities:
Accounts receivable (4,011) (3,176)
Inventory (17,038) (10,734)
Prepaid expenses (457) (119)
Accounts payable 7,416 6,685
Third-party settlement
and related expenses -- (5,000)
Accrued expenses 1,543 (72)
Income tax payable 2,163 2,084
---------- ---------
Net cash used in operations (1,154) (1,554)
---------- ---------
Investing activities:
Purchase of property and equipment, net (5,034) (2,941)
Purchase of intangible assets (700) (1,459)
Purchase of short-term investments (730) (596)
---------- ---------
Net cash used in investing activities (6,464) (4,996)
---------- ---------
Financing activities:
Principal payments on debt (601) (583)
Dividends paid (1,239) (980)
Proceeds from exercise of stock options
and stock purchase plan 601 180
---------- ---------
Net cash used in financing activities (1,239) (1,383)
---------- ---------
Net decrease in cash and cash equivalents (8,857) (7,933)
---------- ---------
Cash and cash equivalents at beginning of period 39,798 36,420
---------- ---------
Cash and cash equivalents at end of period $ 30,941 $ 28,487
========== =========
Cash paid for income tax $ 457 $ --
========== =========
Cash paid for interest $ 671 $ 656
========== =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
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ARBOR DRUGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and reflect, in
the opinion of management, all adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows
at October 31, 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, 1995. 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 $190.7 million for the three months ended October 31,
1995, an increase of 14.0 percent over the three months ended October 31,
1994. The increase reflects an increase in comparable store sales (stores
open for one year or more) of 9.2 percent and sales made by stores opened
in the last 12 months. As of October 31, 1995, the Company operated 172
stores, compared to 158 stores as of October 31, 1994, and 167 stores as
of July 31, 1995.
Prescription drug sales were $96.8 million for the three months ended
October 31, 1995, an increase of 16.5 percent over the three months ended
October 31, 1994. Prescription drug sales represented 50.8 percent of
total sales for the three months ended October 31, 1995, compared to 49.7
percent for the three months ended October 31, 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.
COST OF SALES
Cost of sales represented 74.1 percent of net sales for the three
months ended October 31, 1995, compared to 73.8 percent for the three
months ended October 31, 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 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 EXPENSE
Selling, general and administrative ("SG&A") expenses, as a percentage
of net sales, amounted to 21.8 percent for the three months ended October
31, 1995, as compared to 21.7 percent for the three months ended October
31, 1994.
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PROVISION FOR INCOME TAX
The provision for income tax as a percentage of income before income
tax was 34.0 percent for the three months ended October 31, 1995, compared
to 34.8 percent for the three months ended October 31, 1994. The decrease
was attributable to an increase in interest income not subject to income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the three months ended October 31, 1995
was $1.2 million. Net cash used in investing activities was principally
used for capital expenditures and acquisitions ($5.7 million), cash
dividends ($1.2 million) and principal payments on debt ($.6 million).
These activities resulted in a net cash decrease of $8.9 million.
The Company anticipates fiscal 1996 capital expenditures to total
approximately $22 million for expanding the Company's store base,
remodeling existing stores and investing in retailing systems.
Additionally, the Company plans to expend approximately $8 million for the
expansion of its warehouse and distribution center.
The Company's current expansion plan contemplates adding approximately
15 to 20 new Arbor drugstores in fiscal 1996 through leasing new sites,
developing new sites and, if suitable opportunities arise, acquisitions.
As of December 1, 1995, five new stores have been opened.
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 October 31, 1995, the Company had
outstanding borrowings against its line of credit aggregating $1.5
million.
8
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11: Computation of Earnings Per Share Page 11
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: November 29, 1995 /s/ Gilbert C. Gerhard
------------------ ---------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
9
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
(In Thousands, Except Per Share Data) October 31,
----------------------------
1995 1994
--------- --------
<S> <C> <C>
A. Net Income $ 5,125 (a) $ 4,709 (a)
======== =======
Weighted average number of
common shares outstanding 24,784 (a) 24,515 (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 542 260
-------- -------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 25,326 24,775
======== =======
Weighted average number of common
shares outstanding (a) 24,784 24,515
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 shares 555 310
during the period, using the treasury -------- -------
stock method
C. Average number of common shares
and common equivalent shares 25,339 24,825
for fully diluted earnings per share ======== =======
Primary earnings
per share A $ .20 (b) $ .19
- ======== =======
B
Fully diluted earnings
per share A $ .20 (b) $ .19
- ======== =======
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 distributed on May 15, 1995.
(b) The actual difference between reported earnings per share and
both primary earnings per share and fully diluted earnings per
share is less than $.01, but due to rounding, is shown as
presented.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 30,941
<SECURITIES> 900
<RECEIVABLES> 18,031
<ALLOWANCES> 0
<INVENTORY> 106,591
<CURRENT-ASSETS> 161,759
<PP&E> 129,791
<DEPRECIATION> 51,403
<TOTAL-ASSETS> 261,521
<CURRENT-LIABILITIES> 78,170
<BONDS> 0
<COMMON> 248
0
0
<OTHER-SE> 154,955
<TOTAL-LIABILITY-AND-EQUITY> 261,521
<SALES> 190,704
<TOTAL-REVENUES> 190,704
<CGS> 141,255
<TOTAL-COSTS> 141,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 526
<INCOME-PRETAX> 7,770
<INCOME-TAX> 2,645
<INCOME-CONTINUING> 5,125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,125
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
