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, 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 June 12, 1995 - ---------------------------- --------------------------- Common Stock, $.01 par value 24,744,186 1 2 ARBOR DRUGS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - April 30, 1995 and July 31, 1994 3 Condensed Consolidated Statements of Operation- Three and Nine Months ended April 30, 1995 and 1994 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended April 30, 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 6. Exhibits and Reports on Form 8-K 9 2 3 ARBOR DRUGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in Thousands) April 30, July 31, ASSETS 1995 1994 --------- -------- Current assets: Cash and cash equivalents $ 37,239 $ 36,420 Short-term investments 3,590 1,264 Accounts receivable 15,887 12,782 Inventory 88,926 83,398 Deferred taxes 3,573 4,673 Prepaid expenses 2,667 2,060 --------- --------- Total current assets 151,882 140,597 --------- --------- Property and equipment: Land and land improvements 13,759 10,477 Buildings 16,352 14,824 Furniture, fixtures and equipment 56,065 51,563 Leasehold improvements 37,193 34,156 Less accumulated depreciation (47,695) (40,451) --------- --------- 75,674 70,569 --------- --------- Other Assets: Intangible assets 21,759 22,494 --------- --------- $ 249,315 $233,660 ========= ========= LIABILITIES Current liabilities: Notes payable, current portion $ 1,520 $ 1,483 Accounts payable 56,040 52,918 Liability for third-party settlement and related costs -- 5,000 Accrued rent 6,043 5,146 Accrued expenses 2,584 1,934 Accrued compensation and benefits 4,604 4,765 Income tax payable 3,217 1,197 --------- --------- Total current liabilities 74,008 72,443 --------- --------- Notes payable, net of current portion 22,368 23,679 Deferred income tax 6,363 6,991 Minority interest in subsidiaries 604 583 --------- --------- 29,335 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; 24,742,506 and 24,510,289 issued and outstanding, respectively 247 245 Additional paid-in capital 48,560 46,539 Retained earnings 97,165 83,180 --------- --------- 145,972 129,964 --------- --------- $ 249,315 $ 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 OPERATION (UNAUDITED) (Amounts In Thousands, Except Three Months Ended Nine Months Ended Per Share Data) April 30, April 30, -------------------------- ----------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Net Sales $ 174,806 $ 155,629 $ 527,280 $ 459,029 Costs and expenses: Cost of sales 129,013 114,281 389,015 337,038 Selling, general and administrative 37,466 34,194 110,855 98,515 Provision for third-party settlement -- 7,000 -- 7,000 --------- --------- --------- --------- Income from operations 8,327 154 27,410 16,476 Interest expense (694) (476) (1,745) (1,365) Interest income 379 232 960 763 --------- --------- --------- --------- Income (loss) before income tax 8,012 (90) 26,625 15,874 --------- --------- --------- --------- Provision for income tax 2,782 1,533 9,198 7,019 --------- --------- --------- --------- Net income (loss) $ 5,230 $ (1,623) $ 17,427 $ 8,855 ========= ========= ========= ========= Earnings (loss) per common share $ .21 $ ( .07) $ .71 $ .36 ========= ========= ========= ========= Weighted average number of common shares outstanding 24,713 24,460 24,612 24,402 ========= ========= ========= ========= Cash dividend per common share $ .05 $ .04 $ .14 $ .11 ========= ========= ========= ========= 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) Nine Months Ended April 30, ------------------------ (Dollars In Thousands) 1995 1994 ---- ---- Operating activities: $ 17,427 $ 8,855 Net income Adjustments to reconcile to net cash provided by operations: Depreciation 8,359 6,677 Amortization 3,459 2,827 Deferred income tax 472 3,128 Changes in operating assets and liabilities: Accounts receivable (3,105) (5,067) Inventory (5,528) (8,959) Prepaid expenses (607) (370) Accounts payable 3,122 4,821 Third-party settlement and related expenses (5,000) 1,505 Accrued expenses 1,407 1,822 Income tax payable 2,020 (2,589) -------- -------- Net cash provided by operations 22,026 12,650 -------- -------- Investing activities: Purchase of property and equipment, net (13,464) (8,035) Purchase of intangible assets (2,724) (8,678) Proceeds from (purchase of) short-term investments (2,326) 575 -------- -------- Net cash used in investing activities (18,514) (16,138) -------- -------- Financing activities: Principal payments on debt (1,274) (1,170) Dividends paid (3,442) (2,766) Proceeds from stock purchase plan and exercise of stock options 2,023 787 -------- -------- Net cash used in financing activities ( 2,693) (3,149) -------- -------- Net increase (decrease) in cash and cash equivalents 819 (6,637) -------- -------- Cash and cash equivalents at beginning of period 36,420 41,392 -------- -------- Cash and cash equivalents at end of period $ 37,239 $ 34,755 ======== ======== Cash paid for income tax $ 6,098 $ 6,124 ======== ======== Cash paid for interest $ 2,026 $ 1,548 ======== ======== 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, necessary for a fair presentation of financial position, results of operations and cash flows at April 30, 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. 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 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 $174.8 million and $527.3 million for the three and nine months ended April 30, 1995, respectively, an increase of 12.3 percent and 14.9 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 9.1 percent and 9.0 percent for the three and nine months ended April 30, 1995, respectively, and sales made by stores opened in the last 12 months. As of April 30, 1995, the Company operated 160 stores, compared to 153 stores as of April 30, 1994, and 154 stores as of July 31, 1994. Prescription drug sales were $88.9 million and $261.2 million for the three and nine months ended April 30, 1995, respectively, an increase of 13.7 percent and 16.4 percent, respectively, over the comparable periods of the prior year. Prescription drug sales represented 50.8 percent and 49.5 percent of total sales for the three and nine months ended April 30, 1995, respectively, compared to 50.1 percent and 48.8 percent for the three and nine months ended April 30, 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 11.3 percent and 11.4 percent for the three and nine months ended April 30, 1995, respectively, and the Company's larger store base. COST OF SALES Cost of sales represented 73.8 percent of net sales for the three and nine months ended April 30, 1995, respectively, compared to 73.4 percent for the three and nine months ended April 30, 1994. 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 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 21.4 percent and 21.0 percent for the three and nine months ended April 30, 1995, respectively, as compared to 22.0 percent and 21.5 percent respectively, for the comparable periods of the prior year. The decrease in the three and nine 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 34.7 percent and 34.6 percent, respectively, for the three and nine months ended April 30, 1995, compared to 34.7 percent and 34.5 percent for the three and nine months ended April 30, 1994, respectively. The 1994 amounts exclude the effects of the Company's 1994 settlement with the United States and the State of Michigan. 1994 PROVISION FOR THIRD-PARTY SETTLEMENT AND RELATED EXPENSES The 1994 provision for third party settlement of $7,000,000 reflects the Company's settlement dated June 7, 1994 with the United States and the State of Michigan to resolve certain claims made by them. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased $.8 million during the nine months ended April 30, 1995. The Company expended for the 9 months $19.6 million for dividends and capital expenditures. Cash provided by operations was $22.0 million for the same period. 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. In the third quarter, Arbor opened one new drug store, adding to the six new stores opened in the first half of this year. For the fourth quarter, Arbor is planning on adding nine new stores, enabling us to solidify our position in southeastern Michigan as the drugstore of choice. 8 9 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11: Computation of Earnings Per Share Page 10 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 13, 1995 /s/ Gilbert C. Gerhard --------------------------- Gilbert C. Gerhard (Duly Authorized Officer and Principal Financial Officer) 9 10 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION Exhibit 11 Computation of Earnings Per Share Exhibit 27 Financial Data Schedule 10