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, 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 May 29, 1996 - ---------------------------- --------------------------- Common Stock, $.01 par value 25,053,444 1 2 ARBOR DRUGS, INC. AND SUBSIDIARIES INDEX Page No. PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - April 30, 1996 and July 31, 1995 3 Condensed Consolidated Statements of Income- Three and Nine Months Ended April 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended April 30, 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 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 1996 1995 --------- -------- Current assets: Cash and cash equivalents $ 31,450 $ 39,798 Short-term investments 3,200 170 Accounts receivable 20,270 14,020 Inventory 105,983 89,553 Deferred taxes 2,706 2,494 Prepaid expenses 1,867 2,410 -------- -------- Total current assets 165,476 148,445 -------- -------- Property and equipment: Land and land improvements 16,452 14,591 Buildings 19,896 17,433 Furniture, fixtures and equipment 62,791 58,369 Leasehold improvements 39,131 35,695 Less accumulated depreciation (55,273) (49,705) -------- -------- 82,997 76,383 -------- -------- Other assets: Intangible assets 21,471 21,766 -------- -------- $269,944 $246,594 ======== ======== LIABILITIES Current liabilities: Notes payable, current portion $ 1,558 $ 1,529 Accounts payable 53,416 50,341 Accrued rent 6,467 5,781 Accrued expenses 2,673 1,931 Accrued compensation and benefits 6,169 5,144 Income tax payable 2,009 2,333 -------- -------- Total current liabilities 72,292 67,059 -------- -------- Notes payable, net of current portion 20,920 22,260 Deferred income tax 5,911 5,938 Minority interest in subsidiaries 676 621 -------- -------- 27,507 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; 25,052,544 and 24,765,602 issued and outstanding, respectively 250 248 Additional paid-in capital 53,166 48,902 Retained earnings 116,729 101,566 -------- -------- 170,145 150,716 -------- -------- $269,944 $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 Nine Months Ended Per Share Data) April 30, April 30, --------------------------------------- ------------------------------------- 1996 1995 1996 1995 -------- -------- -------- --------- Net Sales $208,242 $174,806 $613,447 $527,280 Costs and expenses: Cost of sales 154,682 129,013 454,206 389,015 Selling, general and administrative 44,279 37,466 128,708 110,855 -------- -------- -------- -------- Income from operations 9,281 8,327 30,533 27,410 Interest expense (387) (694) (1,360) (1,745) Interest income 339 379 1,129 960 -------- -------- -------- -------- Income before income tax 9,233 8,012 30,302 26,625 -------- -------- -------- -------- Provision for income tax 3,176 2,782 10,409 9,198 -------- -------- -------- -------- Net income $ 6,057 $ 5,230 $ 19,893 $ 17,427 ======== ======== ======== ======== Earnings per common share $ .24 $ .21 $ .80 $ .71 ======== ======== ======== ======== Weighted average number of shares 25,029 24,713 24,904 24,612 ======== ======== ======== ======== Cash dividend per common share $ .07 $ .05 $ .19 $ .14 ======== ======== ======== ======== 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) 1996 1995 --------- --------- Operating activities: Net income $19,893 $17,427 Adjustments to reconcile to net cash provided by operations: Depreciation 8,945 8,359 Amortization 3,324 3,459 Deferred income tax (239) 472 Changes in operating assets and liabilities: Accounts receivable (6,250) (3,105) Inventory (16,430) (5,528) Prepaid expenses 543 (607) Accounts payable 3,075 3,122 Third-party settlement and related expenses - (5,000) Accrued expenses 2,508 1,407 Income tax payable (324) 2,020 -------- -------- Net cash provided by operations 15,045 22,026 -------- -------- Investing activities: Purchase of property and equipment, net (15,559) (13,464) Purchase of intangible assets (3,029) (2,724) Purchase of short-term investments (3,030) (2,326) -------- -------- Net cash used in investing activities (21,618) (18,514) -------- -------- Financing activities: Principal payments on debt (1,311) (1,274) Dividends paid (4,730) (3,442) Proceeds from exercise of stock options and stock purchase plan 4,266 2,023 -------- -------- Net cash used in financing activities (1,775) (2,693) -------- -------- Net increase (decrease) in cash and cash equivalents (8,348) 819 -------- -------- Cash and cash equivalents at beginning of period 39,798 36,420 -------- -------- Cash and cash equivalents at end of period $31,450 $37,239 ======== ======== Cash paid for income tax $10,102 $6,098 ======== ======== Cash paid for interest $1,758 $2,026 ======== ======== 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, 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 $208.2 million and $613.4 million for the three and nine months ended April 30, 1996, respectively, an increase of 19.1 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 10.8 percent and 9.7 percent for three and nine months ended April 30, 1996, respectively, and sales made by stores opened in the last 12 months. As of April 30, 1996, the Company operated 177 stores, compared to 160 stores as of April 30, 1995, and 167 stores as of July 31, 1995. Prescription drug sales were $109.2 million and $311.0 million for the three and nine months ended April 30, 1996, respectively, an increase of 22.8 percent and 19.1 percent, respectively, over the comparable periods of the prior year. Prescription drug sales represented 52.4 percent and 50.7 percent of total sales for the three and nine months ended April 30, 1996, respectively, compared to 50.8 percent and 49.5 percent for the three and nine months ended April 30, 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 74.3 percent and 74.0 percent of net sales for the three and nine months ended April 30, 1996, respectively, compared to 73.8 percent for the three and nine months ended April 30, 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 21.3 percent and 21.0 percent for the three and nine months ended April 30, 1996, respectively, compared to 21.4 percent and 21.0 percent for the three and nine months ended April 30, 1995. 7 8 PROVISION FOR INCOME TAX The provision for income tax as a percentage of income before income tax was 34.4 percent for the three and nine months ended April 30, 1996, compared to 34.7 percent and 34.5 percent, respectively, for the three and nine months ended April 30, 1995. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the nine months ended April 30, 1996 was $15.0 million. Net cash used in investing and financing activities principally consisted of capital expenditures and acquisitions ($18.6 million), cash dividends ($4.7 million) and principal payments on debt ($1.3 million). In the aggregate, the Company's net cash decreased by $8.3 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 new Arbor drugstores in fiscal 1996 through leasing new sites, developing new sites and, if suitable opportunities arise, acquisitions. As of April 30, 1996, 10 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 April 30, 1996, the Company had outstanding borrowings against its line of credit aggregating $1.5 million. 8 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 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: May 30, 1996 /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