<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, 1997 Commission File Number 0-14491
------------------ ---------
ARBOR DRUGS, INC.
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(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
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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
----- -----
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 26, 1997
- ---------------------------- ---------------------------------
Common Stock, $.01 par value 39,082,310
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<PAGE> 2
ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1997 and July 31, 1996 3
Condensed Consolidated Statements of Income-
Three and Six Months Ended January 31, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended January 31, 1997 and 1996 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
</TABLE>
2
<PAGE> 3
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands)
January 31, July 31,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,941 $ 34,955
Short-term investments 335 855
Accounts receivable 25,593 17,507
Inventory 125,749 106,283
Deferred taxes 1,575 1,790
Prepaid expenses 1,041 2,059
--------- ---------
Total current assets 188,234 163,449
--------- ---------
Property and equipment:
Land and land improvements 19,546 16,928
Buildings 27,362 23,879
Furniture, fixtures and equipment 68,665 65,874
Leasehold improvements 42,199 40,036
Less accumulated depreciation (58,480) (57,598)
--------- ---------
99,292 89,119
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Other assets:
Intangible assets 20,873 21,137
--------- ---------
$ 308,399 $ 273,705
========= =========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 589 $ 1,568
Accounts payable 60,647 51,014
Accrued rent 7,494 6,835
Accrued expenses 3,574 2,450
Accrued compensation and benefits 5,728 6,687
Income tax payable 2,488 1,961
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Total current liabilities 80,520 70,515
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Notes payable, net of current portion 16,557 20,802
Deferred income tax 5,303 5,538
Minority interest in subsidiaries 721 681
--------- ---------
22,581 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; 39,079,647 and 37,624,749
issued and outstanding, respectively 391 251
Additional paid-in capital 69,775 53,812
Retained earnings 135,132 122,106
--------- ---------
205,298 176,169
--------- ---------
$ 308,399 $ 273,705
========= =========
</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,
---------------------------------- ------------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 250,318 $ 214,501 $ 475,291 $ 405,205
Costs and expenses:
Cost of sales 185,449 158,269 352,764 299,524
Selling, general and administrative 48,586 42,819 96,442 84,429
------------ ----------- ------------ ------------
Income from operations 16,283 13,413 26,085 21,252
Interest expense (534) (447) (906) (972)
Interest income 357 333 687 789
------------ ----------- ------------ ------------
Income before income tax 16,106 13,299 25,866 21,069
------------ ----------- ------------ ------------
Provision for income tax 5,378 4,588 8,745 7,233
------------ ----------- ------------ ------------
Net income $ 10,728 $ 8,711 $ 17,121 $ 13,836
============ =========== ============ ============
Earnings per common share $ .28 $ .23 $ .45 $ .37
============ =========== ============ ============
Weighted average number of shares 38,899 37,354 38,315 37,265
============ =========== ============ ============
Earnings per common share -
assuming full dilution $ .27 $ .23 $ .43 $ .36
============ =========== ============ ============
Weighted average number of shares -
assuming full dilution 39,929 38,629 39,427 38,511
============ =========== ============ ============
Cash dividend per common share $ .060 $ .047 $ .107 $ .080
============ =========== ============ ============
</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)
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 17,121 $ 13,836
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 8,427 8,170
Changes in operating assets and liabilities:
Accounts receivable (8,086) (6,234)
Inventory (19,466) (13,508)
Prepaid expenses 1,018 1,079
Accounts payable 9,633 4,020
Accrued expenses 844 2,800
Income tax payable 527 1,500
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Net cash provided by operations 10,018 11,663
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Investing activities:
Purchase of property and equipment, net (16,405) (8,130)
Purchase of intangible assets (1,931) (1,624)
Sale of short-term investments 520 10
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Net cash used in investing activities (17,816) (9,744)
--------- ---------
Financing activities:
Principal payments on debt (5,224) (705)
Dividends paid (4,095) (2,979)
Proceeds from exercise of stock options
and stock purchase plan 16,103 3,467
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Net cash provided (used) in financing activities 6,784 (217)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,014) 1,702
--------- ---------
Cash and cash equivalents at beginning of period 34,955 39,798
--------- ---------
Cash and cash equivalents at end of period $ 33,941 $ 41,500
========= =========
Cash paid for income tax $ 4,173 $ 4,770
========= =========
Cash paid for interest $ 1,201 $ 1,117
========= =========
</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, 1997, 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.
On November 19, 1996, the Board of Directors declared a 3 for 2
stock split which was effected in the form of a dividend paid on
December 17, 1996. 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 $250.3 million and $475.3 million for the three
and six months ended January 31, 1997, respectively, an increase of
16.7 percent and 17.3 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 10.0
percent and 10.5 percent for the three and six months ended January
31, 1997, respectively, and sales made by stores opened in the last 12
months. As of January 31, 1997, the Company operated 191 stores,
compared to 174 stores as of January 31, 1996, and 182 stores as of
July 31, 1996.
Prescription drug sales were $127.5 million and $247.3 million
for the three and six months ended January 31, 1997, respectively, an
increase of 21.5 percent and 22.6 percent, respectively, over the
comparable periods of the prior year. Prescription drug sales
represented 50.9 percent and 52.0 percent of total sales for the three
and six months ended January 31, 1997, respectively, compared to 48.9
percent and 49.8 percent for the three and six months ended January
31, 1996. The increases, in both absolute amount and relative
contribution, were primarily attributable to the larger store base, a
greater number of prescriptions filled on a comparable- store basis
and an increase in the average prescription price. The latter
reflected price increases for certain existing brand name drugs and
the introduction of new brand name drugs, offset in part by the lower
prices of generic drugs, which are marketed as the corresponding brand
name drugs lose patent protection.
COST OF SALES
Cost of sales represented 74.1 percent and 74.2 percent of net
sales for the three and six months ended January 31, 1997,
respectively, compared to 73.8 percent and 73.9 percent,
respectively, for the three and six months ended January 31, 1996.
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 19.4 percent and 20.3 percent for
the three and six months ended January 31, 1997, respectively,
compared to 20.0 percent and 20.8 percent, respectively, for the three
and six months ended January 31, 1996. The decreases were primarily
attributable to the Company's efforts to control expenses and by the
higher level of net sales.
7
<PAGE> 8
PROVISION FOR INCOME TAX
The provision for income tax as a percentage of income before
income tax was 33.4 percent and 33.8 percent, respectively, for the
three and six months ended January 31, 1997, compared to 34.5 percent
and 34.3 percent, respectively, for the three and six months ended
January 31, 1996. The decreases were attributable to differences in
determining income for income taxes versus financial statement income.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended January 31, 1997, net cash was provided
by operations ($10.0 million) and through the exercise of stock
options and employee stock purchase plan purchases ($16.1 million).
Cash was principally used for capital expenditures and acquisitions
($18.3 million), principal payments on debt ($5.2 million) and cash
dividends ($4.1 million). In the aggregate, the Company's net cash
decreased by $1.0 million.
Included in the $5.2 million of principal payments on debt is
$4.5 million of payments made in advance of maturity dates to take
advantage of favorable interest rate spreads.
The Company anticipates fiscal 1997 capital expenditures to total
approximately $28 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 18 to 20 new Arbor drugstores in fiscal 1997 through the
leasing and development of new sites and, if suitable opportunities
arise, acquisitions. As of January 31, 1997, 9 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 January 31, 1997, the Company had
no outstanding borrowings against its line of credit.
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
3, 1996. 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 22,355,367 109,585
Markus M. Ernst 22,356,482 108,470
Gilbert C. Gerhard 22,356,482 108,470
David B. Hermelin 22,356,082 108,870
Spencer M. Partrich 22,354,182 110,770
Laurie M. Shahon 22,356,207 108,745
Samuel Valenti III 22,354,981 109,971
</TABLE>
There were 110,083 broker non-votes and abstentions in connection with
the election of the directors at the annual meeting. All votes were cast prior
to the stock split effective December 17, 1996.
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 28, 1997 /s/ Gilbert C. Gerhard
------------------- ------------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
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,
-------------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
A. Net Income $10,728 (a) $8,711 (a) $17,121 (a) $13,836 (a)
======= ====== ======= =======
Weighted average number of
common shares outstanding 38,899 (a) 37,354 (a) 38,315 (a) 37,265 (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 867 1,117 767 973
------- ------ ------- -------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 39,766 38,471 39,082 38,238
======= ====== ======= =======
Weighted average number of common
shares outstanding (a) 38,899 37,354 38,315 37,265
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
during the period, using the treasury
stock method 1,030 1,275 1,112 1,246
------- ------ ------- -------
C. Average number of common shares
and common equivalent shares
for fully diluted earnings per share 39,929 38,629 39,427 38,511
======= ====== ======= =======
Primary earnings
per share: A/B $0.27 $0.23 $0.44 $0.36
======= ====== ======= =======
Fully diluted earnings
per share: A/C $0.27 $0.23 $0.43 $0.36
======= ====== ======= =======
</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 November 19,
1996 and distributed on December 17, 1996.
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 33,941
<SECURITIES> 335
<RECEIVABLES> 25,593
<ALLOWANCES> 0
<INVENTORY> 125,749
<CURRENT-ASSETS> 188,234
<PP&E> 157,772
<DEPRECIATION> 58,480
<TOTAL-ASSETS> 308,399
<CURRENT-LIABILITIES> 80,520
<BONDS> 16,557
0
0
<COMMON> 391
<OTHER-SE> 204,907
<TOTAL-LIABILITY-AND-EQUITY> 308,399
<SALES> 475,291
<TOTAL-REVENUES> 475,291
<CGS> 352,764
<TOTAL-COSTS> 352,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 906
<INCOME-PRETAX> 25,866
<INCOME-TAX> 8,745
<INCOME-CONTINUING> 17,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,121
<EPS-PRIMARY> .45
<EPS-DILUTED> .43
</TABLE>
