<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 April 30, 1997 Commission File Number 0-14491
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ARBOR DRUGS, INC.
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(Exact name of registrant as specified in its charter)
State of Michigan 38-2054345
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3331 West Big Beaver, Troy, Michigan 48084
- ---------------------------------------- -----
(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 May 30, 1997
- ---------------------------- ---------------------------
Common Stock, $.01 par value 39,153,060
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ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1997 and July 31, 1996 3
Condensed Consolidated Statements of Income-
Three and Nine Months Ended April 30, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 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 6. Exhibits and Reports on Form 8-K 9
2
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ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands) April 30, July 31,
1997 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,219 $ 34,955
Short-term investments 5,225 855
Accounts receivable 26,274 17,507
Inventory 119,883 106,283
Deferred taxes 1,802 1,790
Prepaid expenses 1,304 2,059
--------- --------
Total current assets 191,707 163,449
--------- --------
Property and equipment:
Land and land improvements 21,112 16,928
Buildings 26,942 23,879
Furniture, fixtures and equipment 69,869 65,874
Leasehold improvements 42,846 40,036
Less accumulated depreciation (60,694) (57,598)
--------- --------
100,075 89,119
--------- --------
Other assets:
Intangible assets 20,937 21,137
--------- --------
$312,719 $273,705
========= ========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 600 $ 1,568
Accounts payable 57,181 51,014
Accrued rent 7,694 6,835
Accrued expenses 2,968 2,450
Accrued compensation and benefits 7,213 6,687
Income tax payable 2,643 1,961
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Total current liabilities 78,299 70,515
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Notes payable, net of current portion 16,430 20,802
Deferred income tax 5,669 5,538
Minority interest in subsidiaries 737 681
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22,836 27,021
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SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value; 2,000,000
shares authorized; none issued -- --
Common stock: $.01 par value; 40,000,000
shares authorized; 39,145,482 and 37,624,749
issued and outstanding, respectively 391 251
Additional paid-in capital 70,866 53,812
Retained earnings 140,327 122,106
-------- --------
211,584 176,169
-------- --------
$312,719 $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 Nine Months Ended
Per Share Data) April 30, April 30,
------------------ -----------------
1997 1996 1997 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $238,420 $208,242 $713,711 $613,447
Costs and expenses:
Cost of sales 177,842 154,682 530,606 454,206
Selling, general and administr 49,185 44,279 145,627 128,708
-------- -------- -------- --------
Income from operations 11,393 9,281 37,478 30,533
Interest expense (364) (387) (1,270) (1,360)
Interest income 325 339 1,012 1,129
-------- -------- -------- --------
Income before income tax 11,354 9,233 37,220 30,302
Provision for income tax 3,814 3,176 12,559 10,409
-------- -------- -------- --------
Net income $ 7,540 $ 6,057 $ 24,661 $ 19,893
======== ======== ======== ========
Earnings per common share $ 0.19 $ 0.16 $ 0.63 $ 0.52
======== ======== ======== ========
Weighted average number of shares 40,325 38,577 39,303 38,351
======== ======== ======== ========
Earnings per common share -
assuming full dilution $ 0.19 $ 0.16 $ 0.62 $ 0.52
======== ======== ======== ========
Weighted average number of shares -
assuming full dilution 40,325 38,577 39,465 38,396
======== ======== ======== ========
Cash dividend per common share $ 0.060 $ 0.047 $ 0.167 $ 0.127
======== ======== ======== ========
</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 FLOW
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
-----------------
(Dollars in Thousands)
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $ 24,661 $ 19,893
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 12,384 12,269
Changes in operating assets and liabilities:
Accounts receivable (8,767) (6,250)
Inventory (13,600) (16,430)
Prepaid expenses 755 543
Accounts payable 6,167 3,075
Accrued expenses 2,078 2,269
Income tax payable 682 (324)
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Net cash provided by operations 24,360 15,045
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Investing activities:
Purchase of property and equipment, net (20,227) (15,559)
Purchase of intangible assets (2,913) (3,029)
Purchase of short-term investments (4,370) (3,030)
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Net cash used in investing activities (27,510) (21,618)
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Financing activities:
Principal payments on debt (5,340) (1,311)
Dividends paid (6,440) (4,730)
Proceeds from exercise of stock options
and stock purchase plan 17,194 4,266
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Net cash provided (used) in financing activities 5,414 (1,775)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,264 (8,348)
--------- ---------
Cash and cash equivalents at beginning of period 34,955 39,798
--------- ---------
Cash and cash equivalents at end of period $ 37,219 $ 31,450
========= =========
Cash paid for income tax $ 7,582 $ 10,102
========= =========
Cash paid for interest $ 1,517 $ 1,758
========= =========
</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 April 30, 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.
3. NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 128 ("SFAS 128")
"Earnings per share," was issued in February 1997. Adoption of SFAS 128,
effective for periods ending after December 15, 1997, is not expected to
have an effect on reported earnings.
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 $238.4 million and $713.7 million for the three and
nine months ended April 30, 1997, respectively, an increase of 14.5
percent and 16.3 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 7.8 percent and 9.6 percent
for the three and nine months ended April 30, 1997, respectively, and
sales made by stores opened in the last 12 months. As of April 30, 1997,
the Company operated 194 stores, compared to 177 stores as of April 30,
1996, and 182 stores as of July 31, 1996.
Prescription drug sales were $130.1 million and $377.4 million for
the three and nine months ended April 30, 1997, respectively, an increase
of 19.1 percent and 21.4 percent, respectively, over the comparable
periods of the prior year. Prescription drug sales represented 54.6
percent and 52.9 percent of total sales for the three and nine months
ended April 30, 1997, respectively, compared to 52.4 percent and 50.7
percent for the three and nine months ended April 30, 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 74.6 percent and 74.3 percent of net sales
for the three and nine months ended April 30, 1997, respectively,
compared to 74.3 percent and 74.0 percent, respectively, for the three
and nine months ended April 30, 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 20.6 percent and 20.4 percent for
the three and nine months ended April 30, 1997, respectively, compared to
21.3 percent and 21.0 percent, respectively, for the three and nine
months ended April 30, 1996. The decreases were primarily attributable to
the Company's efforts to control expenses and by the higher level of net
sales.
7
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PROVISION FOR INCOME TAX
The provision for income tax as a percentage of income before income tax
was 33.6 percent and 33.7 percent, respectively, for the three and nine months
ended April 30, 1997, compared to 34.4 percent for the three and nine months
ended April 30, 1996. The decreases were attributable to differences in
determining income for income taxes versus financial statement income.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended April 30, 1997, net cash was provided by
operations ($24.4 million) and through the exercise of stock options and
employee stock purchase plan purchases ($17.2 million). Cash was principally
used for capital expenditures and acquisitions ($23.1 million), cash dividends
($6.4 million), principal payments on debt ($5.3 million), and for the purchase
of short-term investments ($4.4 million). In the aggregate, the Company's net
cash increased by $2.3 million.
Included in the $5.3 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
new Arbor drugstores in fiscal 1997 through the leasing and development of new
sites and, if suitable opportunities arise, acquisitions. As of April 30,
1997, 12 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 April 30, 1997, the Company had no outstanding borrowings against its
line of credit.
8
<PAGE> 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11: Computation of Earnings Per Share Page 11
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ARBOR DRUGS, INC.
-----------------
(Registrant)
DATED: June 3, 1997 /s/ Gilbert C. Gerhard
------------ ----------------------
Gilbert C. Gerhard
(Duly Authorized Officer
and Principal Financial
Officer)
9
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
10
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except per share data) April 30, April 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
A. Net Income $ 7,540 (a) $ 6,057 (a) $ 24,661 (a) $ 19,893 (a)
========= ======== ========== =========
Weighted average number of
common shares outstanding 39,104 37,543 38,572 37,356
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 1,221 1,034 731 995
--------- -------- ---------- ---------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 40,325 (a) 38,577 (a) 39,303 (a) 38,351 (a)
========= ======== ========== =========
Weighted average number of common
shares outstanding 39,104 37,543 38,572 37,356
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 1,221 1,034 893 1,040
--------- -------- ---------- ---------
C. Average number of common shares
and common equivalent shares
for fully diluted earnings per share 40,325 (a) 38,577 (a) 39,465 (a) 38,396 (a)
========= ======== ========== =========
Primary earnings
per share: A / B $ 0.19 $ 0.16 $ 0.63 $ 0.52
========= ======== ========== =========
Fully diluted earnings
per share: A / C $ 0.19 $ 0.16 $ 0.62 $ 0.52
========= ======== ========== =========
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 37,219
<SECURITIES> 5,225
<RECEIVABLES> 26,274
<ALLOWANCES> 0
<INVENTORY> 119,883
<CURRENT-ASSETS> 191,707
<PP&E> 160,769
<DEPRECIATION> 60,694
<TOTAL-ASSETS> 312,719
<CURRENT-LIABILITIES> 78,299
<BONDS> 16,430
0
0
<COMMON> 391
<OTHER-SE> 211,193
<TOTAL-LIABILITY-AND-EQUITY> 312,719
<SALES> 713,711
<TOTAL-REVENUES> 713,711
<CGS> 530,606
<TOTAL-COSTS> 530,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,270
<INCOME-PRETAX> 37,220
<INCOME-TAX> 12,559
<INCOME-CONTINUING> 24,661
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,661
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
</TABLE>
