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, 1995 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, 1995 Common Stock, $.01 par value 16,471,624 1 2 ARBOR DRUGS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - January 31, 1995 and July 31, 1994 3 Condensed Consolidated Statements of Income - Three and Six Months ended January 31, 1995 and 1994 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended January 31, 1995 and 1994 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 3 ARBOR DRUGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in Thousands) January 31, July 31, ASSETS 1995 1994 ----------- ---------- Cash and cash equivalents $ 33,678 $ 36,420 Short-term investments --- 1,264 Accounts receivable 15,915 12,782 Inventory 90,231 83,398 Deferred taxes 3,843 4,673 Prepaid expenses 2,360 2,060 -------- -------- Total current assets 146,027 140,597 -------- -------- Property and equipment: Land and land improvements 13,723 10,477 Buildings 15,333 14,824 Furniture, fixtures and equipment 54,953 51,563 Leasehold improvements 34,136 34,156 Less accumulated depreciation (45,351) (40,451) -------- -------- 72,794 70,569 Other assets: -------- -------- Intangible assets 22,439 22,494 -------- -------- $241,260 $233,660 ======== ======== LIABILITIES Current liabilities: Notes payable, current portion $ 1,509 $ 1,483 Accounts payable 50,299 52,918 Liability for third-party settlement and related expenses --- 5,000 Accrued rent 6,196 5,146 Accrued expenses 2,091 1,934 Accrued compensation and benefits 4,311 4,765 Income tax payable 5,527 1,197 -------- -------- Total current liabilities 69,933 72,443 -------- -------- Notes payable, net of current portion 22,976 23,679 Deferred income tax 6,310 6,991 Minority interest in subsidiaries 602 583 -------- -------- 29,888 31,253 SHAREHOLDERS' EQUITY -------- -------- Preferred stock: $.01 par value; 2,000,000 share authorized; none issued --- --- Common stock: $.01 par value; 40,000,000 shares authorized; 16,464,617 and 16,270,323 issued and outstanding, respectively 165 163 Additional paid-in capital 48,105 46,621 Retained earnings 93,169 83,180 -------- -------- 141,439 129,964 -------- -------- $241,260 $233,660 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements. 3 4 ARBOR DRUGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Amounts In Thousands, Except Three Months Ended Six Months Ended Per Share Data) January 31, January 31, ---------------------- ------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Net Sales $185,134 $159,596 $352,474 $303,400 Costs and expenses: Cost of sales 136,504 117,133 260,002 222,757 Selling, general and administrative 37,047 32,435 73,389 64,320 -------- -------- -------- -------- Income from operations 11,583 10,028 19,083 16,323 Interest expense (500) (456) (1,051) (889) Interest income 313 260 581 531 -------- -------- -------- -------- Income before income tax 11,396 9,832 18,613 15,965 Provision for income tax 3,908 3,358 6,416 5,486 -------- -------- -------- -------- Net income $ 7,488 $ 6,474 $ 12,197 $ 10,479 ======== ======== ======== ======== Earnings per common share $ .46 $ .40 $ .74 $ .64 ======== ======== ======== ======== Weighted average number of common shares outstanding 16,408 16,255 16,376 16,250 ======== ======== ======== ======== Cash dividend per common share $ .075 $ 0.060 $ .135 $ 0.110 ======== ======== ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements. 4 5 ARBOR DRUGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended January 31, -------------------- (Dollars In Thousands) 1995 1994 ---- ---- Operating activities: Net income $ 12,197 $ 10,479 Adjustments to reconcile to net cash provided by operations: Depreciation 5,339 4,397 Amortization 2,326 1,755 Deferred income tax 149 2,062 Changes in operating assets and liabilities: Accounts receivable (3,133) (3,504) Inventory (6,833) (13,366) Prepaid expenses ( 300) 84 Accounts payable (2,619) 5,197 Third-party settlement and related expenses (5,000) (5,425) Accrued expenses 753 1,876 Income tax payable 4,330 (1,154) --------- --------- Net cash provided by operations 7,209 2,401 --------- --------- Investing activities: Purchase of property and equipment, net (7,564) (2,210) Purchase of intangible assets (2,252) (7,367) Maturity of short-term investments 1,264 2,522 Purchase of property held for development or resale --- (3,243) --------- --------- Net cash used in investing activities (8,552) (10,298) --------- --------- Financing activities: Principal payments on debt (677) (611) Dividends paid (2,208) (1,787) Proceeds from exercise of stock options 1,486 333 --------- --------- Net cash used in financing activities (1,399) (2,065) --------- --------- Net decrease in cash and cash equivalents (2,742) (9,962) Cash and cash equivalents at beginning of period 36,420 41,392 --------- --------- Cash and cash equivalents at end of period $ 33,678 $ 31,430 ========= ========= Cash paid for income tax $ 1,400 $ 4,376 ========= ========= Cash paid for interest $ 1,111 $ 943 ========= ========= The accompanying notes are an integral part of the condensed consolidated financial statements. 5 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, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows at January 31, 1995 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, 1994. 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 and 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. 6 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 $185.1 million and $352.5 million for the three and six months ended January 31, 1995, respectively, an increase of 16.0 percent and 16.2 percent, respectively, over the comparable periods of the prior year. The increases reflect an increase in comparable store sales (stores open for more than one year) of 9.7 percent and 8.9 percent for the three and six months ended January 31, 1995, respectively, and sales made by stores opened in the last 12 months. As of January 31, 1995, the Company operated 159 stores, compared to 152 stores as of January 31, 1994, and 154 stores as of July 31, 1994. Prescription drug sales reached $89.3 million and $172.4 million for the three and six months ended January 31, 1995, respectively, an increase of 16.8 percent and 17.8 percent, respectively, over the comparable periods of the prior year. Prescription drug sales represented 48.2 percent and 48.9 percent of total sales for the three and six months ended January 31, 1995, respectively, compared to 47.9 percent and 48.2 percent for the three and six months ended January 31, 1994. The increases in both absolute amount and relative contribution reflect both an increase in comparable store pharmacy sales (due to increases both in the number of prescriptions filled and the average prescription price) of 11.4 percent for the three and six months ended January 31, 1995, and the Company's larger store base. COST OF SALES Cost of sales represented 73.7 percent and 73.8 percent of net sales for the three and six months ended January 31, 1995, respectively, compared to 73.4 percent for the three and six months ended January 31, 1994. 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 as compensation for 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, 1995, respectively, as compared to 20.3 percent and 21.2 percent respectively, for the comparable periods of the prior year. The decrease in the three and six month percentages was primarily attributable to the Company's efforts to control operating expenses and by the higher level of net sales. 7 8 PROVISION FOR INCOME TAX The provision for income tax as a percentage of income before income tax was 34.3 percent and 34.5 percent, respectively, for the three and six months ended January 31, 1995, compared to 34.2 percent and 34.4 percent for the three and six months ended January 31, 1994, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $2.7 million during the six months ended January 31, 1995. The Company expended $12.0 million for dividends and capital expenditures, of which $7.2 million was provided by operations. The Company believes that existing cash, cash equivalents, cash provided from 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 1995. During fiscal 1995, the Company plans to open or acquire 17 to 20 stores. As of March 1,1995, six new stores have been opened. During the fiscal quarter ended January 31, 1995, the Company also consolidated an existing drugstore with the operations of another existing drugstore. 8 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 6, 1994. At the annual meeting, the following persons were elected as 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: Votes ----- Name For Withheld ---- --- -------- Eugene Applebaum 13,238,358 75,528 Markus M. Ernst 13,238,458 75,430 Gilbert C. Gerhard 13,238,458 75,428 David B. Hermelin 13,238,458 75,428 Spencer M. Partrich 13,238,458 75,428 Laurie M. Shahon 13,238,358 75,528 Samuel Valenti III 13,238,458 75,428 There were 900 broker non-votes and 74,628 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 Employee Stock Purchase Plan was approved by the Company's shareholders by a vote of 13,264,055 shares for the adoption and 28,144 shares against adoption, with 20,787 shares abstaining and 900 broker non-votes. 9 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: March 1, 1995 /s/ Gilbert C. Gerhard Gilbert C. Gerhard (Duly Authorized Officer and Principal Financial Officer) 10 11 EXHIBIT INDEX Exhibit No. Description Exhibit 11 Computation of Earnings Per Share Exhibit 27 Financial Data Schedule 11