<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 January 31, 1996 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 February 27, 1996
- ---------------------------- --------------------------------
Common Stock, $.01 par value 25,015,508
1
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ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1996 and July 31, 1995 3
Condensed Consolidated Statements of Income-
Three and Six Months Ended January 31, 1996
and 1995 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended January 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 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 10
2
<PAGE> 3
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands)
January 31, July 31,
ASSETS 1996 1995
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $41,500 $39,798
Short-term investments 160 170
Accounts receivable 20,254 14,020
Inventory 103,061 89,553
Deferred taxes 2,328 2,494
Prepaid expenses 1,331 2,410
---------- ---------
Total current assets 168,634 148,445
---------- ---------
Property and equipment:
Land and land improvements 15,701 14,591
Buildings 17,885 17,433
Furniture, fixtures and equipment 61,077 58,369
Leasehold improvements 37,165 35,695
Less accumulated depreciation (53,287) (49,705)
---------- ---------
78,541 76,383
---------- ---------
Other assets:
Intangible assets 21,192 21,766
---------- ---------
$268,367 $246,594
========== =========
LIABILITIES
Current liabilities:
Notes payable, current portion $1,548 $1,529
Accounts payable 54,361 50,341
Accrued rent 6,624 5,781
Accrued expenses 2,905 1,931
Accrued compensation and benefits 5,941 5,144
Income tax payable 3,833 2,333
---------- ---------
Total current liabilities 75,212 67,059
---------- ---------
Notes payable, net of current portion 21,536 22,260
Deferred income tax 5,913 5,938
Minority interest in subsidiaries 666 621
---------- ---------
28,115 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; 25,011,683 and 24,765,602
issued and outstanding, respectively 250 248
Additional paid-in capital 52,367 48,902
Retained earnings 112,423 101,566
---------- ---------
165,040 150,716
---------- ---------
$268,367 $246,594
========== =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE> 4
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts In Thousands, Except Three Months Ended Six Months Ended
Per Share Data) January 31, January 31,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $214,501 $185,134 $405,205 $352,474
Costs and expenses:
Cost of sales 158,269 136,504 299,524 260,002
Selling, general and administrative 42,819 37,047 84,429 73,389
-------- -------- -------- --------
Income from operations 13,413 11,583 21,252 19,083
Interest expense (447) (500) (972) (1,051)
Interest income 333 313 789 581
-------- -------- -------- --------
Income before income tax 13,299 11,396 21,069 18,613
-------- -------- -------- --------
Provision for income tax 4,588 3,908 7,233 6,416
-------- -------- -------- --------
Net income $8,711 $7,488 $13,836 $12,197
======== ======== ======== ========
Earnings per common share $.35 $.30 $.56 $.50
========= ======== ======== ========
Weighted average number of shares 24,903 24,612 24,843 24,563
======== ======== ======== ========
Earnings per common share -
assuming full dilution $.34 $.30 $.54 $.49
======== ======== ======== ========
Weighted average number of shares -
assuming full dilution 25,753 24,994 25,674 24,946
======== ======== ======== ========
Cash dividend per common share $.07 $.05 $.12 $.09
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 5
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
(Dollars In Thousands) -----------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income $13,836 $12,197
Adjustments to reconcile to net cash provided by operations:
Depreciation 5,972 5,339
Amortization 2,198 2,326
Deferred income tax 141 149
Changes in operating assets and liabilities:
Accounts receivable (6,234) (3,133)
Inventory (13,508) (6,833)
Prepaid expenses 1,079 (300)
Accounts payable 4,020 (2,619)
Third-party settlement and related expenses - (5,000)
Accrued expenses 2,659 753
Income tax payable 1,500 4,330
------- -------
Net cash provided by operations 11,663 7,209
------- -------
Investing activities:
Purchase of property and equipment, net (8,130) (7,564)
Purchase of intangible assets (1,624) (2,252)
Purchase of short-term investments 10 1,264
------- -------
Net cash used in investing activities (9,744) (8,552)
------- -------
Financing activities:
Principal payments on debt (705) (677)
Dividends paid (2,979) (2,208)
Proceeds from exercise of stock options
and stock purchase plan 3,467 1,486
------- -------
Net cash used in financing activities ( 217) (1,399)
------- -------
Net increase (decrease) in cash and cash equivalents 1,702 (2,742)
------- -------
Cash and cash equivalents at beginning of period 39,798 36,420
------- -------
Cash and cash equivalents at end of period $41,500 $33,678
======= =======
Cash paid for income tax $4,770 $1,400
======= =======
Cash paid for interest $1,117 $1,111
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE> 6
ARBOR DRUGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows at January 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, 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 $214.5 million and $405.2 million for the three and
six months ended January 31, 1996, respectively, an increase of 15.9 percent and
15.0 percent, respectively, over the comparable periods of the prior year. The
increases reflect an increase in comparable store sales (stores open for one
year or more) of 9.1 percent for three and six months ended January 31, 1996 and
sales made by stores opened in the last 12 months. As of January 31, 1996, the
Company operated 174 stores, compared to 159 stores as of January 31, 1995, and
167 stores as of July 31, 1995.
Prescription drug sales were $104.9 million and $201.8 million for the
three and six months ended January 31, 1996, respectively, an increase of 17.5
percent and 17.1 percent, respectively, over the comparable periods of the
prior year. Prescription drug sales represented 48.9 percent and 49.8 percent
of total sales for the three and six months ended January 31, 1996,
respectively, compared to 48.2 percent and 48.9 percent for the three and six
months ended January 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 73.8 percent and 73.9 percent of net sales for
the three and six months ended January 31, 1996, respectively, compared to
73.7 percent and 73.8 percent, respectively, for the three and six months ended
January 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 20.0 percent and 20.8 percent for the three and six
months ended January 31, 1996, respectively, unchanged from the comparable
periods of the prior year.
7
<PAGE> 8
PROVISION FOR INCOME TAX
The provision for income tax as a percentage of income before income tax
was 34.5 percent and 34.3 percent, respectively, for the three and six months
ended January 31, 1996, compared to 34.3 percent and 34.5 percent, respectively,
for the three and six months ended January 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the six months ended January 31,
1996 was $11.7 million. Net cash used in investing and financing activities
principally consisted of capital expenditures and acquisitions ($9.8 million),
cash dividends ($3.0 million) and principal payments on debt ($.7 million). In
the aggregate, the Company's net cash increased by $1.7 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, during the
fiscal year, 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
January 31, 1996, 7 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 January 31, 1996, the Company had outstanding borrowings against its line of
credit aggregating $1.5 million.
8
<PAGE> 9
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on December
5, 1995. At the annual meeting, the following persons were elected directors of
the Company and the following votes were cast for or were withheld from voting
with respect to the election of each such person:
<TABLE>
<CAPTION>
Votes
-----
Name For Withheld
------------------- ---------- ----------
<S> <C> <C>
Eugene Applebaum 21,652,725 22,490
Markus M. Ernst 21,647,317 27,898
Gilbert C. Gerhard 21,652,878 22,337
David B. Hermelin 21,652,343 22,872
Spencer M. Partrich 21,652,353 22,862
Laurie M. Shahon 21,652,541 22,674
Samuel Valenti III 21,650,499 24,716
</TABLE>
There were 305 broker non-votes and 27,593 abstentions in connection
with the election of the directors at the annual meeting.
In addition, at the annual meeting, the adoption of the Company's 1996
Stock Option Plan was approved by the Company's shareholders by a vote of
16,223,711 shares for the adoption and 3,380,968 shares against adoption, with
100,277 shares abstaining and 1,970,259 broker non-votes.
9
<PAGE> 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11: Computation of Earnings Per Share Page 12
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: February 27, 1996 /s/ Gilbert C. Gerhard
----------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------
<S> <C>
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
</TABLE>
11
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands, except per share data) January 31, January 31,
----------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
A. Net Income $ 8,711 (a) $ 7,488 (a) $ 13,836 (a) $12,197 (a)
Weighted average number of ======== ======= ======== =======
common shares outstanding 24,903 (a) 24,612 (a) 24,843 (a) 24,563 (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 745 266 649 255
-------- ------- -------- -------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 25,648 24,878 25,492 24,818
======== ======= ======== =======
Weighted average number of common
shares outstanding (a) 24,903 24,612 24,843 24,563
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 850 382 831 383
during the period, using the treasury -------- ------- -------- -------
stock method
C. Average number of common shares
and common equivalent shares 25,753 24,994 25,674 24,946
for fully diluted earnings per share ======== ======= ======== =======
Primary earnings
per share A $.34 $.30 $.54 $.49 (b)
B ======== ======= ======== =======
Fully diluted earnings
per share A $.34 $.30 $.54 $.49 (b)
C ======== ======= ======== =======
</TABLE>
(a) These amounts agree with the related amounts in the Condensed Consolidated
Statements of Income. 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.
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 41,500
<SECURITIES> 160
<RECEIVABLES> 20,254
<ALLOWANCES> 0
<INVENTORY> 103,061
<CURRENT-ASSETS> 168,634
<PP&E> 131,828
<DEPRECIATION> 53,287
<TOTAL-ASSETS> 268,367
<CURRENT-LIABILITIES> 75,212
<BONDS> 21,536
0
0
<COMMON> 250
<OTHER-SE> 164,790
<TOTAL-LIABILITY-AND-EQUITY> 268,367
<SALES> 214,501
<TOTAL-REVENUES> 214,501
<CGS> 158,269
<TOTAL-COSTS> 158,269
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 447
<INCOME-PRETAX> 13,299
<INCOME-TAX> 4,588
<INCOME-CONTINUING> 8,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,711
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
