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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, 1996 Commission File Number 0-14491
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ARBOR DRUGS, INC.
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(Exact name of registrant as specified in its charter)
State of Michigan 38-2054345
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3331 West Big Beaver, Troy, Michigan 48084
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(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
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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 27, 1996
- ---------------------------- --------------------------------
Common Stock, $.01 par value 25,907,274
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ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1996 and July 31, 1996 3
Condensed Consolidated Statements of Income-
Three Months Ended October 31, 1996
and 1995 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 1996 and 1995 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)
<TABLE>
<CAPTION>
(Dollars in Thousands)
October 31, July 31,
ASSETS 1996 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,865 $ 34,955
Short-term investments 3,500 855
Accounts receivable 23,578 17,507
Inventory 120,180 106,283
Deferred taxes 1,700 1,790
Prepaid expenses 2,506 2,059
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Total current assets 180,329 163,449
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Property and equipment:
Land and land improvements 18,220 16,928
Buildings 26,548 23,879
Furniture, fixtures and equipment 71,196 65,874
Leasehold improvements 41,361 40,036
Less accumulated depreciation (59,994) (57,598)
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97,331 89,119
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Other assets:
Intangible assets 20,988 21,137
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$298,648 $273,705
=========== ===========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 1,579 $ 1,568
Accounts payable 63,596 51,014
Accrued rent 7,220 6,835
Accrued expenses 2,941 2,450
Accrued compensation and benefits 7,339 6,687
Income tax payable 3,716 1,961
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Total current liabilities 86,391 70,515
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Notes payable, net of current portion 20,181 20,802
Deferred income tax 5,458 5,538
Minority interest in subsidiaries 686 681
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26,325 27,021
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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; 25,419,529 and 25,083,166
issued and outstanding, respectively 254 251
Additional paid-in capital 58,935 53,812
Retained earnings 126,743 122,106
----------- -----------
185,932 176,169
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$298,648 $273,705
=========== ===========
</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,
--------------------------------
1996 1995
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<S> <C> <C>
Net Sales $224,973 $190,704
Costs and expenses:
Cost of sales 167,315 141,255
Selling, general and administrative 47,856 41,609
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Income from operations 9,802 7,840
Interest expense (372) (526)
Interest income 330 456
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Income before income tax 9,760 7,770
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Provision for income tax 3,367 2,645
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Net income $ 6,393 $ 5,125
========== =========
Earnings per common share $ .25 $ .21
========== =========
Weighted average number of shares 25,143 24,784
========== =========
Earnings per common share,
assuming full dilution $ .25 $ .20
========== =========
Weighted average number of shares,
assuming full dilution 25,949 25,339
========== =========
Cash dividend per common share $ .07 $ .05
========== =========
</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)
1996 1995
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<S> <C> <C>
Operating activities:
Net income $ 6,393 $ 5,125
Adjustments to reconcile to net cash provided by operations:
Depreciation 2,996 3,029
Amortization 1,100 1,092
Deferred income tax 10 (16)
Changes in operating assets and liabilities:
Accounts receivable (6,071) (4,011)
Inventory (13,897) (17,038)
Prepaid expenses (447) (457)
Accounts payable 12,582 7,416
Accrued expenses 1,533 1,543
Income tax payable 1,755 2,163
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Net cash provided by (used in) operations 5,954 (1,154)
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Investing activities:
Purchase of property and equipment, net (11,208) (5,034)
Purchase of intangible assets (951) (700)
Purchase of short-term investments (2,645) (730)
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Net cash used in investing activities (14,804) (6,464)
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Financing activities:
Principal payments on debt (610) (601)
Dividends paid (1,756) (1,239)
Proceeds from exercise of stock options
and stock purchase plan 5,126 601
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Net cash provided by (used in) financing activities 2,760 (1,239)
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Net decrease in cash and cash equivalents (6,090) (8,857)
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Cash and cash equivalents at beginning of period 34,955 39,798
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Cash and cash equivalents at end of period $28,865 $30,941
========= =========
Cash paid for income tax $ 165 $ 457
========= =========
Cash paid for interest $ 612 $ 671
========= =========
</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, 1996, 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, 1996. The results of operations for any interim
period should not necessarily be considered indicative of the results
of operations for the full year.
2. INVENTORY VALUATION
Inventory at interim periods is valued on a last-in, first-out
(LIFO) basis which is determined based upon estimates of gross profit
rates, inflation rates and inventory levels, and is adjusted for the
results of physical inventories when taken.
3. STOCK SPLIT
On November 19, 1996, Arbor announced a 3-for-2 stock split to be
effected in the form of a 50 percent stock dividend. The new
shares will be distributed on December 17, 1996 to shareholders of
record as of December 3, 1996. After effecting the stock split,
earnings per share for the three months ending October 31, 1996 would
be $.17 on a primary basis and $.16 on a fully diluted basis and
earnings per share for the three months ending October 31, 1995 would
be $.14 on a primary basis and $.13 on a fully diluted basis.
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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 $225.0 million for the three months ended
October 31, 1996, an increase of 18.0 percent over the three months
ended October 31, 1995. The increase reflects an increase in
comparable store sales (stores open for one year or more) of 11.0
percent and sales made by stores opened in the last 12 months. As of
October 31, 1996, the Company operated 188 stores, compared to 172
stores as of October 31, 1995, and 182 stores as of July 31, 1996.
Prescription drug sales were $119.9 million for the three months
ended October 31, 1996, an increase of 23.8 percent over the three
months ended October 31, 1995, accounting for 53.3 percent of total
sales for the three months ended October 31, 1996, compared to 50.8
percent for the three months ended October 31, 1995. 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 74.4 percent of net sales for the three
months ended October 31, 1996, compared to 74.1 percent for the three
months ended October 31, 1995. 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 21.3 percent for the three months
ended October 31, 1996, compared to 21.8 percent for the three months
ended October 31, 1995. The decrease was primarily attributable to the
Company's efforts to control 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 34.5 percent for the three months ended October 31,
1996, compared to 34.0 percent for the three months ended October 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended October 31, 1996, net cash was
provided by operations ($6.0 million) and through the exercise of
stock options and employee stock purchase plan purchases ($5.1
million). Cash was principally used for capital expenditures and
acquisitions ($12.2 million), purchase of short-term investments ($2.6
million), cash dividends ($1.8 million) and principal payments on debt
($.6 million). In the aggregate, the Company's net cash decreased by
$6.1 million.
The Company anticipates fiscal 1997 capital expenditures to
total approximately $25 million. The funds will be used to open new
stores, remodel existing stores and invest in retailing systems.
The Company's current expansion plan contemplates adding
approximately 15 to 20 new Arbor drugstores in fiscal 1997 through
the leasing and development of new sites and, if suitable
opportunities arise, acquisitions. As of October 31, 1996, 6 new
stores have been opened during the current fiscal year.
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 1997. As of October 31, 1996, the Company had
outstanding borrowings against its line of credit aggregating $1.5
million.
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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.
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(Registrant)
DATED: November 29, 1996 /s/ Gilbert C. Gerhard
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Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
10
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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,
------------------------
1996 1995
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<S> <C> <C>
A. Net Income $ 6,393 (a) $ 5,125 (a)
======== ========
Weighted average number of
common shares outstanding 25,143 (a) 24,784 (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 728 542
-------- --------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 25,871 25,326
======== ========
Weighted average number of common
shares outstanding (a) 25,143 24,784
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 806 555
during the period, using the treasury -------- --------
stock method
C. Average number of common shares
and common equivalent shares 25,949 25,339
for fully diluted earnings per share ======== ========
Primary earnings
per share A $ .25 $ .20
- ======== ========
B
Fully diluted earnings
per share A $ .25 $ .20
- ======== ========
C
</TABLE>
(a) These amounts agree with the related amounts in the Condensed
Consolidated Statements of Income.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 28,865
<SECURITIES> 3,500
<RECEIVABLES> 23,578
<ALLOWANCES> 0
<INVENTORY> 120,180
<CURRENT-ASSETS> 180,329
<PP&E> 157,325
<DEPRECIATION> 59,994
<TOTAL-ASSETS> 298,648
<CURRENT-LIABILITIES> 86,391
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 185,678
<TOTAL-LIABILITY-AND-EQUITY> 298,648
<SALES> 224,973
<TOTAL-REVENUES> 224,973
<CGS> 167,315
<TOTAL-COSTS> 167,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372
<INCOME-PRETAX> 9,760
<INCOME-TAX> 3,367
<INCOME-CONTINUING> 6,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,393
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
