<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 October 31, 1997 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
248-643-9420
------------
(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 November 25, 1997
- ------------------------------------- --------------------------------
Common Stock, $.01 par value 39,507,553
1
<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 -
October 31, 1997 and July 31, 1997 3
Condensed Consolidated Statements of Income-
Three Months Ended October 31, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 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 6. Exhibits and Reports on Form 8-K 9
</TABLE>
2
<PAGE> 3
ARBOR DRUGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands) October 31, July 31,
1997 1997
----------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $26,577 $43,537
Securities available for sale 6,415 335
Accounts receivable 29,197 25,565
Inventory 154,895 131,700
Deferred taxes 2,015 1,965
Prepaid expenses 2,883 1,388
--------- ---------
Total current assets 221,982 204,490
--------- ---------
Property and equipment:
Land and land improvements 28,686 23,124
Buildings 28,010 27,795
Furniture, fixtures and equipment 72,201 71,700
Leasehold improvements 46,475 45,075
Less accumulated depreciation (64,011) (63,745)
--------- ---------
111,361 103,949
--------- ---------
Other assets:
Intangible assets 20,869 21,238
--------- ---------
$354,212 $329,677
========= =========
LIABILITIES
Current liabilities:
Notes payable, current portion $935 $611
Accounts payable 76,266 60,422
Accrued rent 8,184 7,753
Accrued expenses 3,569 2,886
Accrued compensation and benefits 7,389 8,466
Income tax payable 4,837 3,436
--------- ---------
Total current liabilities 101,180 83,574
--------- ---------
Notes payable, net of current portion 16,168 16,301
Deferred income tax 6,053 6,023
Minority interest in subsidiaries 792 768
--------- ---------
23,013 23,092
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value; 2,000,000
shares authorized; none issued -- --
Common stock: $.01 par value; 40,000,000
shares authorized; 39,505,453 and 39,416,331
issued and outstanding, respectively 395 394
Additional paid-in capital 76,464 74,870
Retained earnings 153,160 147,747
--------- ---------
230,019 223,011
--------- ---------
$354,212 $329,677
========= =========
</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
Per Share Data) October 31,
-----------------------------
1997 1996
------- -----------
<S> <C> <C>
Net sales $254,223 $224,973
Costs and expenses:
Cost of sales 189,320 167,315
Selling, general and administrative 53,293 47,856
--------- ---------
Income from operations 11,610 9,802
Interest expense (360) (372)
Interest income 457 330
--------- ---------
Income before income tax 11,707 9,760
Provision for income tax 3,928 3,367
--------- ---------
Net income $7,779 $6,393
========= =========
Earnings per common share $0.19 $0.16
========= =========
Weighted average number of shares 40,978 38,807
========= =========
Earnings per common share -
assuming full dilution $0.19 $0.16
========= =========
Weighted average number of shares -
assuming full dilution 41,111 38,924
========= =========
Cash dividend per common share $0.060 $0.047
========= =========
</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>
Three Months Ended
October 31,
-------------------
(Dollars in Thousands)
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $7,779 $6,393
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 4,117 4,096
Changes in operating assets and liabilities:
Accounts receivable (3,632) (6,071)
Inventory (23,195) (13,897)
Prepaid expenses (1,495) (447)
Accounts payable 15,844 12,582
Accrued expenses 41 1,543
Income tax payable 1,401 1,755
--------- ---------
Net cash provided by operations 860 5,954
--------- ---------
Investing activities:
Purchase of property and equipment, net (10,600) (11,208)
Purchase of intangible assets (560) (951)
Purchase of short-term investments (6,080) (2,645)
--------- ---------
Net cash used in investing activities (17,240) (14,804)
--------- ---------
Financing activities:
Borrowings, net of principal payments on debt 191 (610)
Dividends paid (2,366) (1,756)
Proceeds from exercise of stock options
and stock purchase plan 1,595 5,126
--------- ---------
Net cash (used in) provided by financing activities (580) 2,760
--------- ---------
Net decrease in cash and cash equivalents (16,960) (6,090)
--------- ---------
Cash and cash equivalents at beginning of period 43,537 34,955
--------- ---------
Cash and cash equivalents at end of period $26,577 $28,865
========= =========
Cash paid for income tax $2,280 $165
========= =========
Cash paid for interest $503 $612
========= =========
</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 October 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, 1997. The results of operations for any interim period should
not necessarily be considered indicative of the results of operations for the
full year.
2. INVENTORY VALUATION
Inventory at interim periods is valued on a last-in, first-out (LIFO)
basis which is determined based upon estimates of gross profit rates, inflation
rates and inventory levels, and is adjusted for the results of physical
inventories when taken.
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share," was issued in February 1997 and is effective for interim and annual
periods beginning after December 15, 1997. Earlier adoption is not permitted.
Using SFAS No. 128, "earnings per share" would have been $.20 and $.17, for the
quarters ending October 31, 1997 and 1996, respectively, and "earnings per
share-assuming dilution" would have been $.19 and $.16 for the quarters ending
October 31, 1997 and 1996, respectively.
6
<PAGE> 7
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 $254.2 million for the three months ended October 31,
1997, an increase of 13.0 percent over the three months ended October 31, 1996.
The increase reflects an increase in comparable store sales (stores open for one
year or more) of 7.1 percent and sales made by stores opened in the last 12
months. As of October 31, 1997, the Company operated 202 stores, compared to
188 stores as of October 31, 1996, and 199 stores as of July 31, 1997.
Prescription drug sales were $140.8 million for the three months ended
October 31, 1997, an increase of 17.5 percent over the three months ended
October 31, 1996, accounting for 55.4 percent of total sales for the three
months ended October 31, 1997, compared to 53.3 percent for the three months
ended October 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 74.5 percent of net sales for the three months
ended October 31, 1997, compared to 74.4 percent for the three months ended
October 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 21.0 percent for the three months ended October 31,
1997, compared to 21.3 percent for the three months ended October 31, 1996. The
decrease was 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 33.6 percent for the three months ended October 31, 1997, compared to 34.5
percent for the three months ended October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended October 31, 1997, net cash was provided by
operations ($.9 million) and through the exercise of stock options and employee
stock purchase plan purchases ($1.6 million). Cash was principally used for
capital expenditures and acquisitions ($11.2 million), purchase of short-term
investments ($6.1 million) and cash dividends ($2.4 million). In the aggregate,
the Company's net cash decreased by $17.0 million.
The Company anticipates fiscal 1998 capital expenditures to total
approximately $30 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
20 new Arbor drugstores in fiscal 1998 through the leasing and development of
new sites and, if suitable opportunities arise, acquisitions. As of October 31,
1997, 4 new stores have been opened and one store was consolidated 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 1998. As
of October 31, 1997, the Company had no outstanding borrowings against its line
of credit.
8
<PAGE> 9
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11: Computation of Earnings Per Share Page 11
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K:
None
9
<PAGE> 10
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: November 26, 1997 /s/ Gilbert C. Gerhard
------------------------------
Gilbert C. Gerhard
(Duly Authorized Officer and
Principal Financial Officer)
10
<PAGE> 11
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except per share data) October 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
A. Net Income $7,779 (a) $6,393 (a)
========= =========
Weighted average number of
common shares outstanding 39,446 37,715
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 1,532 1,092
--------- ---------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 40,978 (a) 38,807 (a)
========= =========
Weighted average number of common
shares outstanding 39,446 37,715
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 1,665 1,209
--------- ---------
C. Average number of common shares
and common equivalent shares
for fully diluted earnings per share 41,111 (a) 38,924 (a)
========= =========
Primary earnings
per share: A / B $0.19 (a) $0.16 (a)
========= =========
Fully diluted earnings
per share: A / C $0.19 (a) $0.16 (a)
========= =========
</TABLE>
(a) These amounts agree with the related amounts in the 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 26,577
<SECURITIES> 6,415
<RECEIVABLES> 29,197
<ALLOWANCES> 0
<INVENTORY> 154,895
<CURRENT-ASSETS> 221,982
<PP&E> 175,372
<DEPRECIATION> 64,011
<TOTAL-ASSETS> 354,212
<CURRENT-LIABILITIES> 101,180
<BONDS> 0
0
0
<COMMON> 395
<OTHER-SE> 229,624
<TOTAL-LIABILITY-AND-EQUITY> 354,212
<SALES> 254,223
<TOTAL-REVENUES> 254,223
<CGS> 189,320
<TOTAL-COSTS> 189,320
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360
<INCOME-PRETAX> 11,707
<INCOME-TAX> 3,928
<INCOME-CONTINUING> 7,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,779
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
