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, 1996 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, 1996 - ---------------------------- -------------------------------- Common Stock, $.01 par value 25,015,508 1 2 ARBOR DRUGS, INC. AND SUBSIDIARIES INDEX Page No. PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - January 31, 1996 and July 31, 1995 3 Condensed Consolidated Statements of Income- Three and Six Months Ended January 31, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended January 31, 1996 and 1995 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 1996 1995 ---------- --------- Current assets: Cash and cash equivalents $41,500 $39,798 Short-term investments 160 170 Accounts receivable 20,254 14,020 Inventory 103,061 89,553 Deferred taxes 2,328 2,494 Prepaid expenses 1,331 2,410 ---------- --------- Total current assets 168,634 148,445 ---------- --------- Property and equipment: Land and land improvements 15,701 14,591 Buildings 17,885 17,433 Furniture, fixtures and equipment 61,077 58,369 Leasehold improvements 37,165 35,695 Less accumulated depreciation (53,287) (49,705) ---------- --------- 78,541 76,383 ---------- --------- Other assets: Intangible assets 21,192 21,766 ---------- --------- $268,367 $246,594 ========== ========= LIABILITIES Current liabilities: Notes payable, current portion $1,548 $1,529 Accounts payable 54,361 50,341 Accrued rent 6,624 5,781 Accrued expenses 2,905 1,931 Accrued compensation and benefits 5,941 5,144 Income tax payable 3,833 2,333 ---------- --------- Total current liabilities 75,212 67,059 ---------- --------- Notes payable, net of current portion 21,536 22,260 Deferred income tax 5,913 5,938 Minority interest in subsidiaries 666 621 ---------- --------- 28,115 28,819 ---------- --------- SHAREHOLDERS' EQUITY Preferred stock: $.01 par value; 2,000,000 share authorized; none issued -- -- Common stock: $.01 par value; 40,000,000 shares authorized; 25,011,683 and 24,765,602 issued and outstanding, respectively 250 248 Additional paid-in capital 52,367 48,902 Retained earnings 112,423 101,566 ---------- --------- 165,040 150,716 ---------- --------- $268,367 $246,594 ========== ========= 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, ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Net Sales $214,501 $185,134 $405,205 $352,474 Costs and expenses: Cost of sales 158,269 136,504 299,524 260,002 Selling, general and administrative 42,819 37,047 84,429 73,389 -------- -------- -------- -------- Income from operations 13,413 11,583 21,252 19,083 Interest expense (447) (500) (972) (1,051) Interest income 333 313 789 581 -------- -------- -------- -------- Income before income tax 13,299 11,396 21,069 18,613 -------- -------- -------- -------- Provision for income tax 4,588 3,908 7,233 6,416 -------- -------- -------- -------- Net income $8,711 $7,488 $13,836 $12,197 ======== ======== ======== ======== Earnings per common share $.35 $.30 $.56 $.50 ========= ======== ======== ======== Weighted average number of shares 24,903 24,612 24,843 24,563 ======== ======== ======== ======== Earnings per common share - assuming full dilution $.34 $.30 $.54 $.49 ======== ======== ======== ======== Weighted average number of shares - assuming full dilution 25,753 24,994 25,674 24,946 ======== ======== ======== ======== Cash dividend per common share $.07 $.05 $.12 $.09 ======== ======== ======== ======== 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) ----------------- 1996 1995 -------- -------- Operating activities: Net income $13,836 $12,197 Adjustments to reconcile to net cash provided by operations: Depreciation 5,972 5,339 Amortization 2,198 2,326 Deferred income tax 141 149 Changes in operating assets and liabilities: Accounts receivable (6,234) (3,133) Inventory (13,508) (6,833) Prepaid expenses 1,079 (300) Accounts payable 4,020 (2,619) Third-party settlement and related expenses - (5,000) Accrued expenses 2,659 753 Income tax payable 1,500 4,330 ------- ------- Net cash provided by operations 11,663 7,209 ------- ------- Investing activities: Purchase of property and equipment, net (8,130) (7,564) Purchase of intangible assets (1,624) (2,252) Purchase of short-term investments 10 1,264 ------- ------- Net cash used in investing activities (9,744) (8,552) ------- ------- Financing activities: Principal payments on debt (705) (677) Dividends paid (2,979) (2,208) Proceeds from exercise of stock options and stock purchase plan 3,467 1,486 ------- ------- Net cash used in financing activities ( 217) (1,399) ------- ------- Net increase (decrease) in cash and cash equivalents 1,702 (2,742) ------- ------- Cash and cash equivalents at beginning of period 39,798 36,420 ------- ------- Cash and cash equivalents at end of period $41,500 $33,678 ======= ======= Cash paid for income tax $4,770 $1,400 ======= ======= Cash paid for interest $1,117 $1,111 ======= ======= 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 January 31, 1996, 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, 1995. 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 $214.5 million and $405.2 million for the three and six months ended January 31, 1996, respectively, an increase of 15.9 percent and 15.0 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 9.1 percent for three and six months ended January 31, 1996 and sales made by stores opened in the last 12 months. As of January 31, 1996, the Company operated 174 stores, compared to 159 stores as of January 31, 1995, and 167 stores as of July 31, 1995. Prescription drug sales were $104.9 million and $201.8 million for the three and six months ended January 31, 1996, respectively, an increase of 17.5 percent and 17.1 percent, respectively, over the comparable periods of the prior year. Prescription drug sales represented 48.9 percent and 49.8 percent of total sales for the three and six months ended January 31, 1996, respectively, compared to 48.2 percent and 48.9 percent for the three and six months ended January 31, 1995. 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 73.8 percent and 73.9 percent of net sales for the three and six months ended January 31, 1996, respectively, compared to 73.7 percent and 73.8 percent, respectively, for the three and six months ended January 31, 1995. 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 20.0 percent and 20.8 percent for the three and six months ended January 31, 1996, respectively, unchanged from the comparable periods of the prior year. 7 8 PROVISION FOR INCOME TAX The provision for income tax as a percentage of income before income tax was 34.5 percent and 34.3 percent, respectively, for the three and six months ended January 31, 1996, compared to 34.3 percent and 34.5 percent, respectively, for the three and six months ended January 31, 1995. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the six months ended January 31, 1996 was $11.7 million. Net cash used in investing and financing activities principally consisted of capital expenditures and acquisitions ($9.8 million), cash dividends ($3.0 million) and principal payments on debt ($.7 million). In the aggregate, the Company's net cash increased by $1.7 million. The Company anticipates fiscal 1996 capital expenditures to total approximately $22 million for expanding the Company's store base, remodeling existing stores and investing in retailing systems. Additionally, during the fiscal year, the Company plans to expend approximately $8 million for the expansion of its warehouse and distribution center. The Company's current expansion plan contemplates adding approximately 15 to 20 new Arbor drugstores in fiscal 1996 through leasing new sites, developing new sites and, if suitable opportunities arise, acquisitions. As of January 31, 1996, 7 new stores have been opened. 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 1996. As of January 31, 1996, the Company had outstanding borrowings against its line of credit aggregating $1.5 million. 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 5, 1995. 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: Votes ----- Name For Withheld ------------------- ---------- ---------- Eugene Applebaum 21,652,725 22,490 Markus M. Ernst 21,647,317 27,898 Gilbert C. Gerhard 21,652,878 22,337 David B. Hermelin 21,652,343 22,872 Spencer M. Partrich 21,652,353 22,862 Laurie M. Shahon 21,652,541 22,674 Samuel Valenti III 21,650,499 24,716 There were 305 broker non-votes and 27,593 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 1996 Stock Option Plan was approved by the Company's shareholders by a vote of 16,223,711 shares for the adoption and 3,380,968 shares against adoption, with 100,277 shares abstaining and 1,970,259 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: February 27, 1996 /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