<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, 1996
- ---
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14491
ARBOR DRUGS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2054345
- ------------------------------------- ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3331 West Big Beaver, Troy, Michigan 48084
- ------------------------------------------ -----------
(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 18, 1996, was $611,030,256.
The number of outstanding shares of the registrant's common stock as of
October 18, 1996 was 25,327,679.
Documents Incorporated by Reference
Certain portions of the registrant's definitive proxy statement pursuant
to Regulation 14A of the Securities Exchange Act of 1934 for the 1996 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, 1996, the Company had 182 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 1996,
prescription drugs accounted for approximately 51.3 percent, health and beauty
aids for approximately 20.5 percent, photofinishing and film for approximately
4.9 percent and general merchandise for approximately 23.3 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.
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As part of the Company's merchandising of pharmaceutical products, each
pharmacy department utilizes Arbortech Plus(SM), a computerized pharmacy system.
Arbortech Plus(SM) enables the Company's pharmacists to recall a customer's
pharmacy history, with a view to identifying possible allergies, drug
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 Plus(SM) 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 172 stores
as of July 31, 1996. The Company intends to offer this service in 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, 1996, the Company operated 182 drugstores, a net increase
of 15 drugstores from the end of fiscal 1995. During fiscal 1996, the Company
opened 15 drugstores and purchased the prescription files of a number of
independent drugstores. Assuming no significant construction delays, the
Company anticipates adding approximately 15 to 20 drugstore locations in
Michigan during fiscal 1997. 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 470,000
square foot distribution center, which was expanded in fiscal 1996, is expected
to serve the Company's distribution needs for the next several years. The
Company expects that this expanded facility will accommodate 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 81
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 1996, 42.5 percent of the Company's net sales (approximately 83%
of pharmacy net sales) were attributable to payments by third-party providers
under prescription drug plans. Six of such third-party providers accounted for
approximately one-third of fiscal 1996 net sales and one, Blue Cross Blue
Shield of Michigan, accounted for more than 10 percent of fiscal 1996 net sales
(11.2 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 1996 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 approximately half of the drugstores. The
sale of alcoholic beverages is regulated by the Michigan Liquor Control
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Commission. 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, 1996, the Company had approximately 6,900 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, 1996, over 90 percent of the Company's 182 drugstores were
leased. Only eight 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 470,000 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
Set forth below is certain information with respect to the executive
officers of the Company.
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<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eugene Applebaum 59 Chairman of the Board,
President and Chief Executive
Officer
Markus M. Ernst 59 Executive Vice President,
Chief Operating Officer and
Director
Gilbert C. Gerhard 54 Senior Vice
President-Finance and
Administration, Chief
Financial Officer, Secretary,
Treasurer and Director
Donald M. Stutrud 48 Senior Vice President-Store
Operations
Eric B. Bolokofsky 44 Senior Vice
President-Merchandising
Dennis J. Wozniak 40 Senior Vice
President-Purchasing and
Marketing
John M. Enokian 63 Senior Vice President -
Health Services
</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 1978.
Mr. Enokian has been Senior Vice President - Health Services since April
1996. Mr. Enokian served as Vice President - Health Services from
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February 1991 until April 1996. Mr. Enokian joined the Company in 1965 as a
licensed pharmacist.
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
---- --- ---------
<S> <C> <C> <C>
Fiscal 1995 *
-----------
October 31 $14.50 $12.50 $.04
January 31 16.00 13.13 .05
April 30 17.50 14.67 .05
July 31 17.50 15.75 .05
Fiscal 1996
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October 31 $19.88 $16.25 $.05
January 31 23.25 18.00 .07
April 30 22.50 19.38 .07
July 31 21.75 17.88 .07
Fiscal 1997
-----------
October 31 (through
October 18) $26.00 $21.38 $.07
</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 18, 1996, there were approximately 8,400 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>
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
(In thousands, except per share
data)
Net sales $826,130 $707,150 $618,562 $534,966 $476,848 $405,899
Operating costs and expenses:
Cost of sales 611,924 521,707 454,207 390,896 346,140 292,433
Selling, general and
administrative 172,969 149,829 132,759 117,337 105,783 91,509
Provision for third-party
settlement and related
expenses - - 7,000 16,000 - -
-------- -------- -------- -------- -------- --------
Income from operations 41,237 35,614 24,596 10,733 24,925 21,957
Interest expense (1,654) (2,035) (1,667) (1,738) (2,763) (2,878)
Interest income 1,453 1,359 995 961 1,399 805
-------- -------- -------- -------- -------- --------
Income before income tax 41,036 34,938 23,924 9,956 23,561 19,884
Provision for income tax 14,012 11,871 9,846 3,047 7,787 6,831
-------- -------- -------- -------- -------- --------
Net income $27,024 $23,067 $14,078 $6,909 $15,774 $13,053
======== ======== ======== ======== ======== ========
Earnings per common
share (a) (b) $1.08 $0.94 $0.58 $0.28 $0.65 $0.59
Financial Position
(at fiscal year end, in thousands)
Current assets $163,449 $148,445 $140,597 $133,827 $126,340 $107,604
Current liabilities 70,515 67,059 72,443 71,220 66,477 42,948
Total assets 273,705 246,594 233,660 215,579 200,423 175,673
Notes payable, net of current
portion 20,802 22,260 23,679 18,151 12,986 27,500
Shareholders' equity 176,169 150,716 129,964 118,473 113,874 99,191
Shareholders' equity
per share (a) $7.02 $6.09 $5.30 $4.86 $4.69 $4.11
Dividends per share (a) $0.260 $0.190 $0.153 $0.123 $0.093 $0.085
</TABLE>
(a) Reflects 3-for-2 stock splits effected May 1995 and May 1991.
(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 1996 vs. Fiscal 1995
<TABLE>
<CAPTION>
Components of earnings: Percentage
Percentage Increase
of Fiscal (Decrease)
Fiscal 1996 1996 Net Compared to
(In Millions) Sales Fiscal 1995
------------- ---------- -----------
<S> <C> <C> <C>
Net sales $826.1 100.0% 16.8%
Cost of sales 611.9 74.1 17.3
Selling, general and
administrative expense 173.0 20.9 15.4
------------- ---------- -----------
Income from operations 41.2 5.0 15.8
Interest expense, net of
interest income .2 -- (70.3)
Income tax 14.0 1.7 18.0
------------- ---------- -----------
Net income $27.0 3.3% 17.2%
============= ========== ===========
</TABLE>
Net sales reached $826.1 million in fiscal 1996, an increase of 16.8
percent over fiscal 1995 net sales of $707.2 million. The increase reflected
an increase in comparable store sales (sales by stores in operation for at
least 12 months) of 10.0 percent and the sales made by the drugstores opened in
fiscal 1996.
Prescription drug sales accounted for 51.3 percent of net sales in fiscal
1996, an increase from 49.8 percent in fiscal 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.
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 percentage of net sales
attributable to the general merchandise and health and beauty aids categories
declined slightly (from 24.4% and 21.1%, respectively, in fiscal 1995 to 23.3%
and 20.5%, respectively, in fiscal 1996). The photofinishing and film category
increased its contribution to net sales (from 4.7% in fiscal 1995 to 4.9% in
fiscal 1996)due to new product introductions.
While net sales attributable to the general merchandise and health and
beauty aids categories continues to increase in absolute terms, these
categories declined slightly as a percentage of total sales owing to greater
growth in the prescription drug sales category.
The Company's gross margin declined from 26.2 percent in fiscal 1995 to
25.9 percent in fiscal 1996 primarily due to the effect of rising
pharmaceutical product costs and gross margin percentage pressure due to
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the reimbursement practices of the Company's third-party providers.
Third-party providers, which accounted for approximately 83 percent of the
Company's prescription drug sales in fiscal 1996, 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 ("SG&A") expenses decreased as a
percentage of net sales to 20.9 percent in fiscal 1996 from 21.2 percent in
fiscal 1995. The decrease was primarily attributable to the Company's efforts
to control expenses and by the higher level of net sales.
The Company's effective tax rate (the provision for income tax as a
percentage of income before income tax) increased to 34.1 percent in fiscal
1996 from 34.0 percent in fiscal 1995.
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.
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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. Photofinishing and film increased
as a percent of net sales, from 4.6% in 1994 to 4.7% in 1995 due to new product
introductions. The percentage of net sales attributable to the general
merchandise and health and beauty aids categories declined (from 24.8% and
21.6%, respectively in fiscal 1994 to 24.4% and 21.1%, respectively in fiscal
1995); however, net sales attributable to these categories 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
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.
"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 increase 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.
Liquidity and Capital Resources
During fiscal 1996, net cash was provided by operations ($27.4 million) and
through the exercise of stock options and employee stock purchase plan purchases
($4.9 million). Cash was principally used for capital expenditures and
acquisitions ($28.5 million), cash dividends ($6.5 million) and principal
payments on debt ($1.4 million). These activities resulted in a net cash
decrease of $4.8 million.
The Company's capital expenditures in fiscal 1996 were made primarily to
expand the Company's distribution center and 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 1997 capital expenditures of
approximately $25 million for these purposes.
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During fiscal 1996, the Company added 15 drugstores through opening new
locations. The Company also acquired the prescription files of various
independent drugstores. The Company's current expansion plan contemplates
adding approximately 15 to 20 new Arbor drugstores in fiscal 1997 through
leasing new sites, developing new sites and if suitable opportunities arise,
acquisitions. Four drugstores have been opened in fiscal 1997 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 1997.
As of July 31, 1996, the Company had outstanding borrowings against its line of
credit aggregating $1.5 million.
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-12, 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
Information required by this Item, which is not included in Part I hereof,
will be contained in the Proxy Statement for the Annual Meeting of Shareholders
(the "1996 Proxy Statement"), to be held on December 3, 1996, 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 1996 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 1996 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 1996 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, 1996
and 1995
Consolidated Statements of Income -- Fiscal Years
ended July 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity --
Fiscal Years ended July 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Fiscal
Years ended July 31, 1996, 1995 and 1994
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,
1996.
(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.
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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.
14
<PAGE> 15
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 18, 1996.
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 18, 1996.
Signature Capacity
- --------- --------
/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
15
<PAGE> 16
/s/ Spencer M. Partrich
- ------------------------------
Spencer M. Partrich Director
/s/ Laurie M. Shahon
- ------------------------------
Laurie M. Shahon Director
/s/ Samuel Valenti III
- ------------------------------
Samuel Valenti III Director
16
<PAGE> 17
ARBOR DRUGS, INC. AND SUBSIDIARIES
_____________
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 31, 1996 AND 1995 AND
FINANCIAL STATEMENT SCHEDULES
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
17
<PAGE> 18
ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
_____________
Pages
-----
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets -- July 31, 1996 and 1995 F-3
Consolidated Statements of Income -- Fiscal Years ended
July 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity --
Fiscal Years ended July 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows -- Fiscal Years
ended July 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6 - F-9
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts F-12
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.
F-1
<PAGE> 19
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 schedule 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
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
Detroit, Michigan
September 27, 1996
F-2
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
ARBOR DRUGS, INC. AND SUBSIDIARIES
July 31, 1996 1995
- -----------------------------------------------------------------
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $34,955 $39,798
Short-term investments 855 170
Accounts receivable 17,507 14,020
Inventory 106,283 89,553
Prepaid expenses 3,849 4,904
- -----------------------------------------------------------------
Total current assets 163,449 148,445
- -----------------------------------------------------------------
Property and equipment:
Land and land improvements 16,928 14,591
Buildings 23,879 17,433
Furniture, fixtures and equipment 65,874 58,369
Leasehold improvements 40,036 35,695
Less accumulated depreciation (57,598) (49,705)
- -----------------------------------------------------------------
89,119 76,383
- -----------------------------------------------------------------
Intangible assets 21,137 21,766
- -----------------------------------------------------------------
Total assets $273,705 $246,594
=================================================================
LIABILITIES
Current liabilities:
Notes payable, current portion $1,568 $1,529
Accounts payable 51,014 50,341
Accrued rent and other 9,285 7,712
Accrued compensation and benefits 6,687 5,144
Income tax payable 1,961 2,333
- -----------------------------------------------------------------
Total current liabilities 70,515 67,059
- -----------------------------------------------------------------
Notes payable, net of current portion 20,802 22,260
Deferred income tax 5,538 5,938
Minority interest in subsidiaries 681 621
- -----------------------------------------------------------------
27,021 28,819
- -----------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value;
2,000,000 shares authorized;
none issued -- --
Common stock: $.01 par value;
40,000,000 shares authorized;
25,083,166 and 24,765,602 issued
and outstanding, respectively 251 248
Additional paid-in capital 53,812 48,902
Retained earnings 122,106 101,566
- -----------------------------------------------------------------
176,169 150,716
- -----------------------------------------------------------------
Total liabilities & shareholders' equity $273,705 $246,594
=================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 21
CONSOLIDATED STATEMENTS OF INCOME
ARBOR DRUGS, INC. AND SUBSIDIARIES
Fiscal Years Ended July 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net sales $826,130 $707,150 $618,562
Costs and expenses:
Cost of sales 611,924 521,707 454,207
Selling, general and administrative 172,969 149,829 132,759
Provision for third-party settlement
and related expenses -- -- 7,000
- --------------------------------------------------------------------------------
Income from operations 41,237 35,614 24,596
Interest expense (1,654) (2,035) (1,667)
Interest income 1,453 1,359 995
- --------------------------------------------------------------------------------
Income before income tax 41,036 34,938 23,924
Provision for income tax 14,012 11,871 9,846
- --------------------------------------------------------------------------------
Net income $ 27,024 $ 23,067 $ 14,078
================================================================================
Weighted average number of common
shares outstanding (in thousands) 24,944 24,646 24,427
================================================================================
Earnings per common share $ 1.08 $ 0.94 $ 0.58
================================================================================
Cash dividend per common share $ 0.260 $ 0.190 $ 0.153
================================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional
--------------- Paid-In Retained
(In thousands) Shares Amount Capital Earnings TOTAL
- --------------------------------------------------------------------------------
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
Net income -- -- -- 27,024 27,024
Cash dividends of $.260
per share -- -- -- (6,484) (6,484)
Exercise of options and
stock purchase plan 317 3 4,910 -- 4,913
- --------------------------------------------------------------------------------
Balance, July 31, 1996 25,083 $251 $53,812 $122,106 $176,169
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
ARBOR DRUGS, INC. AND SUBSIDIARIES
Fiscal Years Ended July 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating activities:
Net income $27,024 $23,067 $14,078
Adjustments to reconcile net
cash provided by operations:
Depreciation 11,971 10,886 9,027
Amortization 4,471 4,601 3,940
Deferred income tax 304 (1,053) (17)
Changes in operating assets
and liabilities:
Accounts receivable (3,487) (1,238) (4,469)
Inventory (16,730) (6,155) (13,057)
Prepaid expenses 351 1,829 3,573
Accounts payable 673 (2,577) 11,357
Third-party settlement
and related expenses -- (5,000) (11,000)
Accrued expenses 3,176 1,049 3,008
Income tax payable (372) 1,136 (2,430)
- --------------------------------------------------------------------------------
Net cash provided
by operations 27,381 26,545 14,010
- --------------------------------------------------------------------------------
Investing activities:
Purchase of property and equipment, net (24,707) (16,700) (14,371)
Purchase of intangible assets (3,842) (3,873) (9,907)
(Purchase), sale or maturity of
short-term investments (685) 1,094 2,211
- --------------------------------------------------------------------------------
Net cash used in
investing activities (29,234) (19,479) (22,067)
- --------------------------------------------------------------------------------
Financing activities:
Proceeds from borrowings -- -- 6,900
Principal payments on debt (1,419) (1,373) (1,228)
Dividends paid (6,484) (4,681) (3,746)
Proceeds from exercise of stock options
and stock purchase plan 4,913 2,366 1,159
- --------------------------------------------------------------------------------
Net cash provided by
(used in) financing activities (2,990) (3,688) 3,085
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (4,843) 3,378 (4,972)
Cash and cash equivalents at
beginning of year 39,798 36,420 41,392
- --------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $34,955 $39,798 $36,420
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 23
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.
STOCK REPURCHASE PLAN
On July 25, 1996, the Board of Directors authorized management to
repurchase up to one million shares of the Company's common stock in
the open market, at prices acceptable to management. Shares purchased under
the program will be retired. No shares have been purchased to date.
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
$25,607,000 and $22,814,000 at July 31, 1996 and 1995, 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:
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
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, 1996, 1995 and 1994 was approximately $15,146,000, $14,774,000 and
$13,079,000, respectively.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation," was issued in October 1995,
with an effective date for fiscal years beginning in 1996, accordingly, the
Company has yet to adopt the provisions promulgated therein. It is the
Company's intent that, when adopted, such compensation will continue to be
measured using the intrinsic value method, in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees."
F-6
<PAGE> 24
2. INTANGIBLE ASSETS:
Intangible assets consist of the following:
July 31, 1996 1995
----------------------------------------------------------------------
(Dollars in thousands)
Prescription customer files $19,026 $19,767
Leaseholds 3,091 3,631
Developed software 5,067 4,883
Other 12,274 10,895
----------------------------------------------------------------------
39,458 39,176
Less accumulated amortization 18,321 17,410
----------------------------------------------------------------------
$21,137 $21,766
======================================================================
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.
All intangible assets are evaluated for potential impairment of value on
an on-going basis. Such evaluations consider current, as well as
anticipated, operating results, measured on the basis of undiscounted cash
flows, of the operation relative to the asset. Usefulness of the underlying
asset in the operation of the Company is also a basis of evaluation.
Additionally, trends and other circumstances are used in such evaluations and
estimates.
3. NOTES PAYABLE:
Approximate fair market values are as follows:
<TABLE>
<CAPTION>
July 31, 1996 1995
- -------------------------------------------------------------------------------------------------------
(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 $ 6,634 $ 6,778
Senior note, interest at 9.93 percent, semiannual interest and
$500,000 principal payments, final payment due October 31, 1997 3,500 4,500
Mortgage note payable, interest at 9.68 percent, monthly interest
and principal installments of $62,298 through July 1, 2012 6,071 6,223
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 4,554 4,677
Other borrowings 111 111
- -------------------------------------------------------------------------------------------------------
22,370 23,789
Less current portion 1,568 1,529
- -------------------------------------------------------------------------------------------------------
$20,802 $22,260
=======================================================================================================
</TABLE>
As of July 31, 1996, the Company had a $50 million line of credit with
an outstanding balance of $1.5 million. This credit facility expires
November 30, 2001.
Maturities of notes payable for the next five fiscal years
are approximately as follows:
<TABLE>
<S> <C> <C> <C>
1997 ........$1,458,000 1998 ........$4,501,000 1999 ........$ 548,000
2000 ........$ 600,000 2001 ........$ 656,000
</TABLE>
The senior note, term loan and line of 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, 1996, 1995 and
1994 were approximately $552,000, $328,000 and $264,000, respectively.
Cash paid for interest, net of capitalized interest, was approximately
$1,646,000, $2,232,000 and $1,700,000 for the years ended July 31, 1996, 1995
and 1994, 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
F-7
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
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:
Year Ended July 31, 1996 1995
-----------------------------------------------------------------------------
(Dollars in thousands)
Rental expense:
Minimum rentals $16,974 $14,848
Contingent rentals 1,846 1,574
-----------------------------------------------------------------------------
$18,820 $16,422
=============================================================================
Minimum annual rentals:
Year ending July 31:
1997 $ 21,388
1998 22,361
1999 21,447
2000 19,178
2001 17,452
Remaining lease term 191,719
-----------------------------------------------------------------------------
$293,545
=============================================================================
Accrued rent of $6,835,000 and $5,781,000 is included in accrued expenses
as of July 31, 1996 and 1995, 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:
Year Ended July 31, 1996 1995 1994
-----------------------------------------------------------------------------
(Dollars in thousands)
Currently payable $13,708 $10,745 $6,112
Deferred 304 1,126 3,734
-----------------------------------------------------------------------------
$14,012 $11,871 $9,846
=============================================================================
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:
July 31, 1996 1995
-----------------------------------------------------------------------------
(Dollars in thousands)
Vendor agreement discounts $ 832 $ 130
Depreciation and amortization (251) 291
Provision for third-party settlements -- 1,750
-----------------------------------------------------------------------------
The provision for income tax, as a percentage of income before tax, was
34.1 percent, 34.0 percent and 41.2 percent in 1996, 1995 and 1994,
respectively. These rates differ from the statutory rate due to:
In 1996 and 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.
Prepaid expenses include the current portion of deferred income taxes of
$1,790,000 and $2,494,000 in 1996 and 1995, respectively.
Cash paid for income taxes was approximately $12,738,000, $8,800,000 and
$8,135,000 in 1996, 1995 and 1994, respectively.
F-8
<PAGE> 26
7. STOCK OPTION AND STOCK PURCHASE PLANS:
Under the Company's 1986 and 1996 Stock Option Plans, 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 1,198,000 shares exercisable at July 31, 1996.
The Company is currently authorized to grant options to purchase up to an
aggregate of 5,806,250 shares of its common stock, of which 4,366,001
shares have been granted and 3,340,469 shares were outstanding as of July
31, 1996.
Stock option transactions are summarized as follows.
<TABLE>
<CAPTION>
Number of Shares Option Price Range
-------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 738,000 16.25-17.50
Terminated (47,150) 11.67-17.50
Exercised (215,726) 7.45-15.83
-------------------------------------------------------------------------------------------------
Balance, July 31, 1996 3,340,469 $6.05-17.50
=================================================================================================
</TABLE>
The Company has an Employee Stock Purchase Plan where employees may
subscribe, through payroll withholdings, to purchase shares of the Company's
common stock at the lower of 85% of market value at the beginning or end of
each calendar quarter. Employees may not purchase in excess of 15% of gross
pay under the plan, or 25% of gross pay in combination with withholdings
under the 401(k) plan.
Transactions under the Employee Stock Purchase Plan are summarized as
follows:
<TABLE>
<CAPTION>
Number of Shares Issue Price Range
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares issued during the year ended July 31,
1996 101,828 $14.025-17.80
1995 45,715 $13.600-17.53
====================================================================================================
</TABLE>
8. QUARTERLY FINANCIAL SUMMARY (UNAUDITED):
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
For the Three Months Ended
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year OCT. 31, JAN. 31, APRIL 30, JULY 31,
1996 1995 1996 1996 1996
-----------------------------------------------------------------------------------------------
Net sales $190,704 $214,501 $208,242 $212,683
Gross profit 49,449 56,232 53,560 54,965
Net income 5,125 8,711 6,057 7,131
Earnings per share $ .21 $ .35* $ .24 $ .28
===============================================================================================
<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>
Amounts may not total due to rounding.
*Earnings per share, assuming full dilution, were $.34.
F-9
<PAGE> 27
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
- ----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year End July 31, 1996:
=======================
Allowance For Doubtful
Accounts $ 543,390 $ 366,537 - $ 209,223 $ 700,704
Year End July 31, 1995:
=======================
Allowance For Doubtful
Accounts $1,018,510 $ 212,817 - $ 687,937 $ 543,390
Year End July 31, 1994:
=======================
Allowance For Doubtful $1,014,652 $ 236,526 - $ 232,668 $1,018,510
Accounts
</TABLE>
F-12
<PAGE> 28
INDEX TO 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.
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.
<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) -------------------- --------------------------
1996 1995 1996 1995
----- ----- ---- ----
<S> <C> <C> <C> <C>
A. Net Income $7,131 $5,640 $27,024(a) $23,067(a)
====== ====== ======= ======
Weighted average number
of common shares
outstanding 25,064 24,746 24,944(a) 24,646(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 590 421 640 332
------ ------ ------- ------
B. Average number of
common shares and
common equivalent
shares for primary
earnings per share 25,654 25,167 25,584 24,978
====== ====== ======= ======
Weighted average number
of common shares
outstanding 25,064 24,746 24,944(a) 24,646(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 590 440 640 443
common 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. 25,654 25,186 25,584 25,089
====== ====== ======= ======
Primary earnings per
share A $0.28 $0.22 $1.06 $0.92(b)
B ====== ====== ======= ======
Fully diluted earnings
per share A $0.28 $0.22 $1.06 $0.92(b)
C ====== ====== ======= ======
(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.
</TABLE>
<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
Children's Hospital of Michigan Outpatient Pharmacy, Inc.
(51% owned) Michigan
Medical Center Pharmacies, Inc. (51% owned) Michigan
Richard Investment Company Michigan
E.F. Mile Corporation Michigan
Pharmacy Advisory Company Michigan
</TABLE>
All subsidiaries conduct business using the names above.
<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 and 333-13433) of our report dated September 27, 1996, on
our audits of the consolidated financial statements and financial statement
schedule of Arbor Drugs, Inc. and Subsidiaries as of July 31, 1996 and 1995,
and for the years ended July 31, 1996, 1995 and 1994, which report is included
in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
- ------------------------------
Detroit, Michigan
October 17, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 34,955
<SECURITIES> 855
<RECEIVABLES> 17,507
<ALLOWANCES> 0
<INVENTORY> 106,283
<CURRENT-ASSETS> 163,449
<PP&E> 146,717
<DEPRECIATION> 57,598
<TOTAL-ASSETS> 273,705
<CURRENT-LIABILITIES> 70,515
<BONDS> 20,802
0
0
<COMMON> 251
<OTHER-SE> 175,918
<TOTAL-LIABILITY-AND-EQUITY> 273,705
<SALES> 826,130
<TOTAL-REVENUES> 826,130
<CGS> 611,924
<TOTAL-COSTS> 611,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,654
<INCOME-PRETAX> 41,036
<INCOME-TAX> 14,012
<INCOME-CONTINUING> 27,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,024
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
