-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LtQsErVZfES55qpnFqKZtsbDbL9+lUfofUif4seREfpsLLYjimM1IqrnkEo8nYKp tEBxm8XZBjq8uNtFlphpxw== 0000950124-96-004438.txt : 19961023 0000950124-96-004438.hdr.sgml : 19961022 ACCESSION NUMBER: 0000950124-96-004438 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961021 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARBOR DRUGS INC CENTRAL INDEX KEY: 0000791048 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 382054345 STATE OF INCORPORATION: MI FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14491 FILM NUMBER: 96645683 BUSINESS ADDRESS: STREET 1: 3331 W BIG BEAVER CITY: TROY STATE: MI ZIP: 48084-2510 BUSINESS PHONE: 8106439420 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K - --- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1996 - --- - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-14491 ARBOR DRUGS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2054345 - ------------------------------------- ------------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3331 West Big Beaver, Troy, Michigan 48084 - ------------------------------------------ ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (810) 643-9420 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) 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. (X) Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the voting stock held by non-affiliates of the registrant as of October 18, 1996, was $611,030,256. The number of outstanding shares of the registrant's common stock as of October 18, 1996 was 25,327,679. Documents Incorporated by Reference Certain portions of the registrant's definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 for the 1996 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. 1 2 PART I Item 1. Business General Arbor Drugs, Inc. (the "Company") is the largest Michigan-based drugstore chain and the second largest drugstore chain operating in Michigan in terms of total revenues. As of July 31, 1996, the Company had 182 stores located primarily in southeastern Michigan. Unless the context otherwise requires, references to the "Company" include the Company's consolidated subsidiaries. References to a fiscal year are to the twelve months ended July 31. Products The Company's drugstores sell four principal categories of products: prescription drugs, health and beauty aids (including proprietary drugs and cosmetics), photofinishing and film and general merchandise. General merchandise includes seasonal and promotional goods, greeting cards, convenience foods and alcoholic and nonalcoholic beverages. In fiscal 1996, prescription drugs accounted for approximately 51.3 percent, health and beauty aids for approximately 20.5 percent, photofinishing and film for approximately 4.9 percent and general merchandise for approximately 23.3 percent of the Company's net sales. Contributions to net sales are not indicative of contributions to income from operations because gross margins vary among product categories and products within each category. The Company's business normally generates somewhat higher revenues during its second and fourth fiscal quarters (the Christmas and summer seasons). The Company believes that these higher revenues, in combination with the fixed nature of certain administrative and store operating costs and seasonal changes in product mix, result in higher operating income for these periods. Merchandising and Marketing The Company's merchandising strategy is to offer a broad selection of traditional drugstore items, including both nationally advertised and private label brand products. Substantially all products are offered at competitive prices. The Company emphasizes value and customer service in attractive, conveniently located drugstores. It uses color, signs, packaging and other merchandising aids to reinforce its name and low prices, and to showcase its products. The pharmacy department in each drugstore carries a complete line of both brand name and generic drugs. The Company has been expanding its prescription drug business by promoting the use of less costly generic drugs, whenever possible, and by entering into arrangements with insurance companies, health maintenance organizations ("HMOs") and other health care groups for the sale of prescription drugs under third-party reimbursement programs. See "Significant Customers" below. 2 3 As part of the Company's merchandising of pharmaceutical products, each pharmacy department utilizes Arbortech Plus(SM), a computerized pharmacy system. Arbortech Plus(SM) enables the Company's pharmacists to recall a customer's pharmacy history, with a view to identifying possible allergies, drug interactions or therapeutic duplication, and to provide customers with a complete record of medication dispensed. This system affords each of the Company's drugstores access to this information, thus enabling customers to be served by any store in the chain. Arbortech Plus(SM) also enables the Company to identify generic equivalents of brand name drugs, centrally control prescription prices, increase the speed of processing prescriptions and reduce the paperwork normally involved in, and thus expedite the collection of amounts due the Company under, third-party reimbursement programs. The Company promotes its private label Arbor(TM) brand products and presently offers approximately 1,000 such products, including a wide variety of vitamins, products for skin, hair and personal care, health products and proprietary drugs for colds, allergies and other ailments. Offering private label products enables the Company to sell products, comparable in quality to name brand products, at substantially lower prices to its customers, but at higher gross margins for the Company. The primary photo processing marketing program used by the Company is Picture! Picture!(SM), which offers a "two for the price of one" photo processing service, with guaranteed overnight processing. Additional programs are Picture! Plus!(SM) and the Picture! Picture! Club(SM), which offer customers one print plus a free roll of film and prizes for volume photofinishing. Picture Pronto(SM), is a one-hour photo processing service offered in 172 stores as of July 31, 1996. The Company intends to offer this service in all new locations. All photo processing services are provided by an independent contractor. The Company advertises extensively, principally through the use of television, radio, direct mail and advertising circulars. Expansion Program As of July 31, 1996, the Company operated 182 drugstores, a net increase of 15 drugstores from the end of fiscal 1995. During fiscal 1996, the Company opened 15 drugstores and purchased the prescription files of a number of independent drugstores. Assuming no significant construction delays, the Company anticipates adding approximately 15 to 20 drugstore locations in Michigan during fiscal 1997. The Company may also continue to purchase the prescription files of various independent drugstores, as opportunities arise. In addition to adding drugstores in southeastern Michigan, the Company has expanded, and plans to continue to expand, in other areas of Michigan. The Company may also expand into contiguous states. The Company's 470,000 square foot distribution center, which was expanded in fiscal 1996, is expected to serve the Company's distribution needs for the next several years. The Company expects that this expanded facility will accommodate approximately 400 stores. 3 4 Purchasing and Distribution The Company centrally purchases most of its merchandise directly from manufacturers, enabling it to benefit from promotional programs and volume discounts that certain manufacturers offer to retailers. Approximately 81 percent of the merchandise purchased by the Company is received at its distribution center for redistribution to its drugstores. The balance of store merchandise is shipped directly to the Company's drugstores by manufacturers and distributors at prices negotiated at the corporate level. Significant Customers In fiscal 1996, 42.5 percent of the Company's net sales (approximately 83% of pharmacy net sales) were attributable to payments by third-party providers under prescription drug plans. Six of such third-party providers accounted for approximately one-third of fiscal 1996 net sales and one, Blue Cross Blue Shield of Michigan, accounted for more than 10 percent of fiscal 1996 net sales (11.2 percent). The Company participates in the majority of third-party plans offered to employer groups in its primary marketplace, the greater metropolitan Detroit area. Accordingly, if any employer group were to change its third-party plan, the Company believes it is likely that it would continue to fill prescriptions for such group under a different third-party plan. In the event the Company were unable to service one or more of its principal third-party provider plans, however, the Company's revenues would be adversely affected. Competition The Company's primary competitors are other drugstore chains, independent drugstore operators, mail order distributors, hospitals, HMOs, department stores (including discount stores) and supermarkets. Many of the businesses with which the Company competes are larger and have been in business longer or have substantially greater financial resources than the Company. Competition remained keen during fiscal 1996 with the Company competing on the basis of price, convenience, store design, product selection, quality and variety. See "Merchandising and Marketing" above. Significant Proprietary Rights The Arbor(TM) trade name is considered to be of material importance to the business of the Company. The Company also holds servicemarks for some of its photo finishing products and pharmacy systems. Regulatory Matters and Insurance All of the Company's pharmacy departments and all pharmacists employed by the Company are licensed by the Michigan Board of Pharmacy. The Company's drugstores and its warehouse facility are also registered with the United States Drug Enforcement Administration and are subject to various licensing and regulatory requirements. Beer and wine are sold in all of the Company's drugstores, and liquor is sold in approximately half of the drugstores. The sale of alcoholic beverages is regulated by the Michigan Liquor Control 4 5 Commission. By virtue of these various license and registration requirements, the Company is obligated to observe certain rules and regulations. A violation of these rules and regulations could result in a suspension or revocation of such licenses or registrations with respect to one or more of the Company's drugstores or the distribution center. The Company carries general liability insurance, subject to self-insured retentions, with respect to druggist, product, premises and "dram-shop" claims. Employees As of July 31, 1996, the Company had approximately 6,900 employees, approximately 400 of whom were employed in the Company's executive office and distribution center and the remainder of whom were employed in the Company's drugstores. A majority of the drugstore employees work on a part-time basis (fewer than 35 hours per week). The Company's employees are not represented by unions. The Company believes that its relations with its employees are good. Item 2. Properties As of July 31, 1996, over 90 percent of the Company's 182 drugstores were leased. Only eight of the leases are due to expire within the next five years. In addition to base rentals, the majority of the Company's store leases require additional rentals based on a percentage of sales. In most instances, the leases obligate the Company to pay its pro rata share of common area maintenance charges, taxes and insurance. The Company owns its 470,000 square foot distribution center, which is located in Novi, Michigan. The Company leases its 54,000 square foot executive offices, which are located in Troy, Michigan. Item 3. Legal Proceedings In November 1993 the Securities and Exchange Commission (the "SEC") issued a formal Order of Private Investigation relating to the Company's reporting of certain third-party reimbursement practices and a contractual dispute over these practices with Blue Cross of Michigan (which has been settled). The Company has complied with the SEC's requests for information made in November 1993 and October 1994. The Company is also involved in various routine litigation incidental to its business, none of which, in the opinion of management, is deemed to be material. Item 4. Submission of Matters to a Vote of Security Holders None. Item 10. Directors and Executive Officers of the Registrant Set forth below is certain information with respect to the executive officers of the Company. 5 6
Name Age Position ---- --- -------- Eugene Applebaum 59 Chairman of the Board, President and Chief Executive Officer Markus M. Ernst 59 Executive Vice President, Chief Operating Officer and Director Gilbert C. Gerhard 54 Senior Vice President-Finance and Administration, Chief Financial Officer, Secretary, Treasurer and Director Donald M. Stutrud 48 Senior Vice President-Store Operations Eric B. Bolokofsky 44 Senior Vice President-Merchandising Dennis J. Wozniak 40 Senior Vice President-Purchasing and Marketing John M. Enokian 63 Senior Vice President - Health Services
Mr. Applebaum is a founder of the Company and has been the President and a Director of the Company and its predecessors since 1963. In January 1985, Mr. Applebaum was elected Chairman of the Board and Chief Executive Officer. Mr. Applebaum has been a licensed pharmacist in the State of Michigan since 1960. Mr. Ernst has been Executive Vice President and a Director of the Company since 1974, having served as a director and executive officer of one of the Company's predecessors since 1968. Mr. Ernst has also served as Chief Operating Officer since 1985. Mr. Ernst joined the Company in 1968. Mr. Gerhard has been Senior Vice President - Finance and Administration since February 1994. Mr. Gerhard has also served as Chief Financial Officer, Secretary and Treasurer since 1983 when he joined the Company. Mr. Gerhard was Vice President-Finance and Administration from 1983 until February 1994. Mr. Stutrud has been Senior Vice President - Store Operations since February 1991. Mr. Stutrud served as Vice President - Store Operations from March 1986 until January 1991. Mr. Stutrud joined the Company in 1971. Mr. Bolokofsky has been Senior Vice President - Merchandising since February 1994. Mr. Bolokofsky served as Vice President - Merchandising from October 1987 until February 1994. Mr. Bolokofsky joined the Company in 1976. Mr. Wozniak has been Senior Vice President - Purchasing and Marketing since February 1994. Mr. Wozniak served as Vice President - Purchasing from October 1987 until February 1994. Mr. Wozniak joined the Company in 1978. Mr. Enokian has been Senior Vice President - Health Services since April 1996. Mr. Enokian served as Vice President - Health Services from 6 7 February 1991 until April 1996. Mr. Enokian joined the Company in 1965 as a licensed pharmacist. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is regularly quoted on the National Association of Securities Dealers Automated Quotation System (NASDAQ) National Market System under the symbol ARBR. The following table sets forth, for the periods indicated, the high and low closing sale prices for the Company's Common Stock and cash dividends paid.
Common Stock Prices ------------------- Dividends Quarter Ended High Low Per Share ---- --- --------- Fiscal 1995 * ----------- October 31 $14.50 $12.50 $.04 January 31 16.00 13.13 .05 April 30 17.50 14.67 .05 July 31 17.50 15.75 .05 Fiscal 1996 ----------- October 31 $19.88 $16.25 $.05 January 31 23.25 18.00 .07 April 30 22.50 19.38 .07 July 31 21.75 17.88 .07 Fiscal 1997 ----------- October 31 (through October 18) $26.00 $21.38 $.07
*All data has been restated to give effect to the May 1995 3-for-2 stock split. The Company intends to continue to declare quarterly cash dividends on its Common Stock, subject to the Company's earnings, financial condition, capital requirements and other such factors as are deemed relevant by the Board of Directors. On October 18, 1996, there were approximately 8,400 shareholders of record of the Company (including individual participants in security position listings). 7 8 Item 6. Six Year Summary of Selected Financial Data The following tables set forth selected consolidated financial data for each of the fiscal years shown.
1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- Results of Operations (In thousands, except per share data) Net sales $826,130 $707,150 $618,562 $534,966 $476,848 $405,899 Operating costs and expenses: Cost of sales 611,924 521,707 454,207 390,896 346,140 292,433 Selling, general and administrative 172,969 149,829 132,759 117,337 105,783 91,509 Provision for third-party settlement and related expenses - - 7,000 16,000 - - -------- -------- -------- -------- -------- -------- Income from operations 41,237 35,614 24,596 10,733 24,925 21,957 Interest expense (1,654) (2,035) (1,667) (1,738) (2,763) (2,878) Interest income 1,453 1,359 995 961 1,399 805 -------- -------- -------- -------- -------- -------- Income before income tax 41,036 34,938 23,924 9,956 23,561 19,884 Provision for income tax 14,012 11,871 9,846 3,047 7,787 6,831 -------- -------- -------- -------- -------- -------- Net income $27,024 $23,067 $14,078 $6,909 $15,774 $13,053 ======== ======== ======== ======== ======== ======== Earnings per common share (a) (b) $1.08 $0.94 $0.58 $0.28 $0.65 $0.59 Financial Position (at fiscal year end, in thousands) Current assets $163,449 $148,445 $140,597 $133,827 $126,340 $107,604 Current liabilities 70,515 67,059 72,443 71,220 66,477 42,948 Total assets 273,705 246,594 233,660 215,579 200,423 175,673 Notes payable, net of current portion 20,802 22,260 23,679 18,151 12,986 27,500 Shareholders' equity 176,169 150,716 129,964 118,473 113,874 99,191 Shareholders' equity per share (a) $7.02 $6.09 $5.30 $4.86 $4.69 $4.11 Dividends per share (a) $0.260 $0.190 $0.153 $0.123 $0.093 $0.085
(a) Reflects 3-for-2 stock splits effected May 1995 and May 1991. (b) 1994 and 1993 per share amounts include charges for the settlement of third-party providers' reimbursement claims and related expenses and the disposition of a lease dispute. Excluding these charges, 1994 and 1993 earnings per common share would have been $ .83 and $ .74, respectively. 8 9 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations: Fiscal 1996 vs. Fiscal 1995
Components of earnings: Percentage Percentage Increase of Fiscal (Decrease) Fiscal 1996 1996 Net Compared to (In Millions) Sales Fiscal 1995 ------------- ---------- ----------- Net sales $826.1 100.0% 16.8% Cost of sales 611.9 74.1 17.3 Selling, general and administrative expense 173.0 20.9 15.4 ------------- ---------- ----------- Income from operations 41.2 5.0 15.8 Interest expense, net of interest income .2 -- (70.3) Income tax 14.0 1.7 18.0 ------------- ---------- ----------- Net income $27.0 3.3% 17.2% ============= ========== ===========
Net sales reached $826.1 million in fiscal 1996, an increase of 16.8 percent over fiscal 1995 net sales of $707.2 million. The increase reflected an increase in comparable store sales (sales by stores in operation for at least 12 months) of 10.0 percent and the sales made by the drugstores opened in fiscal 1996. Prescription drug sales accounted for 51.3 percent of net sales in fiscal 1996, an increase from 49.8 percent in fiscal 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. The net sales attributable to each of the Company's three other principal product categories increased in absolute terms as a result of the larger store base and increased comparable store sales. The percentage of net sales attributable to the general merchandise and health and beauty aids categories declined slightly (from 24.4% and 21.1%, respectively, in fiscal 1995 to 23.3% and 20.5%, respectively, in fiscal 1996). The photofinishing and film category increased its contribution to net sales (from 4.7% in fiscal 1995 to 4.9% in fiscal 1996)due to new product introductions. While net sales attributable to the general merchandise and health and beauty aids categories continues to increase in absolute terms, these categories declined slightly as a percentage of total sales owing to greater growth in the prescription drug sales category. The Company's gross margin declined from 26.2 percent in fiscal 1995 to 25.9 percent in fiscal 1996 primarily due to the effect of rising pharmaceutical product costs and gross margin percentage pressure due to 9 10 the reimbursement practices of the Company's third-party providers. Third-party providers, which accounted for approximately 83 percent of the Company's prescription drug sales in fiscal 1996, 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 ("SG&A") expenses decreased as a percentage of net sales to 20.9 percent in fiscal 1996 from 21.2 percent in fiscal 1995. The decrease was primarily attributable to the Company's efforts to control expenses and by the higher level of net sales. The Company's effective tax rate (the provision for income tax as a percentage of income before income tax) increased to 34.1 percent in fiscal 1996 from 34.0 percent in fiscal 1995. Results of Operations: Fiscal 1995 vs. Fiscal 1994
Components of earnings: Percentage Percentage Increase of Fiscal (Decrease) Fiscal 1995 1995 Net Compared to (In Millions) Sales Fiscal 1994 ------------- ---------- ----------- Net sales $707.2 100.0% 14.3% Cost of sales 521.7 73.8 14.9 Selling, general and administrative expense 149.9 21.2 12.9 ------------- ---------- ----------- Income from operations 35.6 5.0 44.8 Interest expense, net of interest income 0.6 0.1 (14.3) Income tax 11.9 1.6 21.4 ------------- ---------- ----------- Net income $23.1 3.3% 63.8% ============= ========== ===========
Net sales reached $707.2 million in fiscal 1995, an increase of 14.3 percent over fiscal 1994 net sales of $618.6 million. The increase reflected an increase in comparable store sales (sales by stores in operation for at least 12 months) of 9.0 percent and the sales made by the drugstores opened in fiscal 1995. Prescription drug sales accounted for 49.8 percent of net sales in fiscal 1995, an increase from 49.0 percent in fiscal 1994. 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. 10 11 The net sales attributable to each of the Company's three other principal product categories increased in absolute terms as a result of the larger store base and increased comparable store sales. Photofinishing and film increased as a percent of net sales, from 4.6% in 1994 to 4.7% in 1995 due to new product introductions. The percentage of net sales attributable to the general merchandise and health and beauty aids categories declined (from 24.8% and 21.6%, respectively in fiscal 1994 to 24.4% and 21.1%, respectively in fiscal 1995); however, net sales attributable to these categories continues to increase in absolute terms. The Company's gross margin declined from 26.6 percent in fiscal 1994 to 26.2 percent in fiscal 1995 primarily due to the effect of rising pharmaceutical product costs and gross margin percentage pressure due to the reimbursement practices of the Company's third-party providers. Third-party providers, which accounted for approximately 80 percent of the Company's prescription drug sales in fiscal 1995, 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. "SG&A" expenses decreased as a percentage of net sales to 21.2 percent in fiscal 1995 from 21.5 percent in fiscal 1994. The decrease was primarily attributable to the Company's efforts to control expenses and by the higher level of net sales. 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. The Company's effective tax rate (the provision for income tax as a percentage of income before income tax) decreased to 34.0 percent in fiscal 1995 from 41.2 percent in fiscal 1994. The increase reflects the Company's preliminary assessment for the 1994 provision that the after-tax effect of the 1994 settlement, referred to above, would be approximately $6.1 million. Liquidity and Capital Resources During fiscal 1996, net cash was provided by operations ($27.4 million) and through the exercise of stock options and employee stock purchase plan purchases ($4.9 million). Cash was principally used for capital expenditures and acquisitions ($28.5 million), cash dividends ($6.5 million) and principal payments on debt ($1.4 million). These activities resulted in a net cash decrease of $4.8 million. The Company's capital expenditures in fiscal 1996 were made primarily to expand the Company's distribution center and store base and remodel existing stores. In addition, the Company continued to invest in various retailing systems, such as its pharmacy (Arbortech PlusSM) and point-of-sale computer systems. The Company anticipates fiscal 1997 capital expenditures of approximately $25 million for these purposes. 11 12 During fiscal 1996, the Company added 15 drugstores through opening new locations. The Company also acquired the prescription files of various independent drugstores. The Company's current expansion plan contemplates adding approximately 15 to 20 new Arbor drugstores in fiscal 1997 through leasing new sites, developing new sites and if suitable opportunities arise, acquisitions. Four drugstores have been opened in fiscal 1997 to date. 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 1997. As of July 31, 1996, the Company had outstanding borrowings against its line of credit aggregating $1.5 million. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this Item are included in the Consolidated Financial Statements set forth on pages F-1 through F-12, attached hereto and found immediately following the signature page of this Report. Item 9. Disagreements on Accounting and Financial Disclosures None. PART III Item 10. Directors and Executive Officers of the Registrant Information required by this Item, which is not included in Part I hereof, will be contained in the Proxy Statement for the Annual Meeting of Shareholders (the "1996 Proxy Statement"), to be held on December 3, 1996, under the captions, "Election of Directors" and is incorporated herein by reference. Item 11. Executive Compensation Information required by this Item will be contained in the 1996 Proxy Statement under the captions, "Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Information Concerning Meetings of the Board of Directors and Board Committees and Director Compensation," and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this Item will be contained in the 1996 Proxy Statement, under the captions, "Election of Directors" and "Beneficial Ownership of Common Stock," and is incorporated herein by reference. 12 13 Item 13. Certain Relationships and Related Transactions Information required by this Item will be contained in the 1996 Proxy Statement under the caption, "Certain Relationships and Related Transactions," and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K (a) The following financial statements and financial statement schedules are filed as part of this Report: (1) Financial Statements: Report of Independent Accountants Consolidated Financial Statements: Consolidated Balance Sheets -- July 31, 1996 and 1995 Consolidated Statements of Income -- Fiscal Years ended July 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity -- Fiscal Years ended July 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Fiscal Years ended July 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required or because the information is included in the consolidated financial statements or notes thereto. (3) Executive Compensation Plans and Arrangements - 1986 Stock Option Plan - 1996 Stock Option Plan (b) Reports on Form 8-K. No Reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended July 31, 1996. (c) Exhibits 3.1 Restated Articles of Incorporation, as amended, filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1988, are incorporated herein by reference. 13 14 3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4378), are incorporated herein by reference. 4.0 Credit Agreement (the "Credit Agreement") dated as of May 14, 1992 among Arbor Drugs, Inc., NBD Bank, N.A., Manufacturers Bank, N.A., Continental Bank N.A., and NBD Bank, N.A., as Agent, filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1992, is incorporated herein by reference. 4.0A Letter, dated June 2, 1994, from NBD Bank, N.A. (in its capacity as a Bank and as Agent), Continental Bank, N.A. and Comerica Bank to Arbor Drugs, Inc., filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1994, is incorporated herein by reference. 4.0B First Amendment to Credit Agreement, dated as of August 29, 1994, among Arbor Drugs, Inc., NBD Bank, N.A. (in its capacity as a Bank and as Agent), Continental Bank, N.A. and Comerica Bank, filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1994, is incorporated herein by reference. 4.1 The Registrant undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. 10.1 Amended and restated Arbor Drugs, Inc. Stock Option Plan, dated June 4, 1993, filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1993, is incorporated herein by reference. 10.2 Arbor Drugs, Inc. 1996 Stock Option Plan, filed as Annex 1 to the Registrant's Proxy Statement for its 1995 Annual Meeting of Shareholders, is incorporated herein by reference. 11. Computation of Earnings Per Share. 21. Subsidiaries of The Registrant. 23.1 Consent of Coopers & Lybrand L.L.P., independent accountants. 27. Financial Data Schedule. 14 15 SIGNATURES Pursuant to the requirements of Section 13 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, on October 18, 1996. ARBOR DRUGS, INC. By: /s/ Eugene Applebaum ------------------------------------ Eugene Applebaum, Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on October 18, 1996. Signature Capacity - --------- -------- /s/ Eugene Applebaum - ------------------------------ Eugene Applebaum Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) /s/ Markus M. Ernst - ------------------------------ Markus M. Ernst Executive Vice President, Chief Operating Officer and Director /s/ Gilbert C. Gerhard - ------------------------------ Gilbert C. Gerhard Senior Vice President-Finance and Administration, Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial and Accounting Officer) /s/ David B. Hermelin - ------------------------------ David B. Hermelin Director 15 16 /s/ Spencer M. Partrich - ------------------------------ Spencer M. Partrich Director /s/ Laurie M. Shahon - ------------------------------ Laurie M. Shahon Director /s/ Samuel Valenti III - ------------------------------ Samuel Valenti III Director 16 17 ARBOR DRUGS, INC. AND SUBSIDIARIES _____________ REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 31, 1996 AND 1995 AND FINANCIAL STATEMENT SCHEDULES FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994 17 18 ARBOR DRUGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES _____________ Pages ----- Report of Independent Accountants F-2 Financial Statements: Consolidated Balance Sheets -- July 31, 1996 and 1995 F-3 Consolidated Statements of Income -- Fiscal Years ended July 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity -- Fiscal Years ended July 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Cash Flows -- Fiscal Years ended July 31, 1996, 1995 and 1994 F-5 Notes to Consolidated Financial Statements F-6 - F-9 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts F-12 All other schedules are omitted because they are not applicable, not required or because the information is included in the consolidated financial statements or notes thereto. F-1 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Arbor Drugs, Inc.: We have audited the consolidated financial statements and the financial statement schedule of Arbor Drugs, Inc. and Subsidiaries listed in the index on page F-1 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arbor Drugs, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. - ----------------------------- Detroit, Michigan September 27, 1996 F-2 20 CONSOLIDATED BALANCE SHEETS ARBOR DRUGS, INC. AND SUBSIDIARIES July 31, 1996 1995 - ----------------------------------------------------------------- (Dollars in thousands) ASSETS Current assets: Cash and cash equivalents $34,955 $39,798 Short-term investments 855 170 Accounts receivable 17,507 14,020 Inventory 106,283 89,553 Prepaid expenses 3,849 4,904 - ----------------------------------------------------------------- Total current assets 163,449 148,445 - ----------------------------------------------------------------- Property and equipment: Land and land improvements 16,928 14,591 Buildings 23,879 17,433 Furniture, fixtures and equipment 65,874 58,369 Leasehold improvements 40,036 35,695 Less accumulated depreciation (57,598) (49,705) - ----------------------------------------------------------------- 89,119 76,383 - ----------------------------------------------------------------- Intangible assets 21,137 21,766 - ----------------------------------------------------------------- Total assets $273,705 $246,594 ================================================================= LIABILITIES Current liabilities: Notes payable, current portion $1,568 $1,529 Accounts payable 51,014 50,341 Accrued rent and other 9,285 7,712 Accrued compensation and benefits 6,687 5,144 Income tax payable 1,961 2,333 - ----------------------------------------------------------------- Total current liabilities 70,515 67,059 - ----------------------------------------------------------------- Notes payable, net of current portion 20,802 22,260 Deferred income tax 5,538 5,938 Minority interest in subsidiaries 681 621 - ----------------------------------------------------------------- 27,021 28,819 - ----------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock: $.01 par value; 2,000,000 shares authorized; none issued -- -- Common stock: $.01 par value; 40,000,000 shares authorized; 25,083,166 and 24,765,602 issued and outstanding, respectively 251 248 Additional paid-in capital 53,812 48,902 Retained earnings 122,106 101,566 - ----------------------------------------------------------------- 176,169 150,716 - ----------------------------------------------------------------- Total liabilities & shareholders' equity $273,705 $246,594 ================================================================= The accompanying notes are an integral part of the consolidated financial statements. F-3 21 CONSOLIDATED STATEMENTS OF INCOME ARBOR DRUGS, INC. AND SUBSIDIARIES Fiscal Years Ended July 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Net sales $826,130 $707,150 $618,562 Costs and expenses: Cost of sales 611,924 521,707 454,207 Selling, general and administrative 172,969 149,829 132,759 Provision for third-party settlement and related expenses -- -- 7,000 - -------------------------------------------------------------------------------- Income from operations 41,237 35,614 24,596 Interest expense (1,654) (2,035) (1,667) Interest income 1,453 1,359 995 - -------------------------------------------------------------------------------- Income before income tax 41,036 34,938 23,924 Provision for income tax 14,012 11,871 9,846 - -------------------------------------------------------------------------------- Net income $ 27,024 $ 23,067 $ 14,078 ================================================================================ Weighted average number of common shares outstanding (in thousands) 24,944 24,646 24,427 ================================================================================ Earnings per common share $ 1.08 $ 0.94 $ 0.58 ================================================================================ Cash dividend per common share $ 0.260 $ 0.190 $ 0.153 ================================================================================ CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional --------------- Paid-In Retained (In thousands) Shares Amount Capital Earnings TOTAL - -------------------------------------------------------------------------------- Balance, July 31, 1993 16,242 $162 $45,463 $ 72,848 $118,473 Net income -- -- -- 14,078 14,078 Cash dividends of $.153 per share -- -- -- (3,746) (3,746) Exercise of stock options, 98 1 1,158 -- 1,159 - -------------------------------------------------------------------------------- Balance, July 31, 1994 16,340 163 46,621 83,180 129,964 Net income -- -- -- 23,067 23,067 Cash dividends of $.190 per share -- -- -- (4,681) (4,681) Exercise of options and stock purchase plan 179 2 2,364 -- 2,366 Three-for-two stock split 8,247 83 (83) -- -- - -------------------------------------------------------------------------------- Balance, July 31, 1995 24,766 248 48,902 101,566 150,716 Net income -- -- -- 27,024 27,024 Cash dividends of $.260 per share -- -- -- (6,484) (6,484) Exercise of options and stock purchase plan 317 3 4,910 -- 4,913 - -------------------------------------------------------------------------------- Balance, July 31, 1996 25,083 $251 $53,812 $122,106 $176,169 ================================================================================ The accompanying notes are an integral part of the consolidated financial statements. F-4 22 CONSOLIDATED STATEMENTS OF CASH FLOWS ARBOR DRUGS, INC. AND SUBSIDIARIES Fiscal Years Ended July 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (Dollars in thousands) Operating activities: Net income $27,024 $23,067 $14,078 Adjustments to reconcile net cash provided by operations: Depreciation 11,971 10,886 9,027 Amortization 4,471 4,601 3,940 Deferred income tax 304 (1,053) (17) Changes in operating assets and liabilities: Accounts receivable (3,487) (1,238) (4,469) Inventory (16,730) (6,155) (13,057) Prepaid expenses 351 1,829 3,573 Accounts payable 673 (2,577) 11,357 Third-party settlement and related expenses -- (5,000) (11,000) Accrued expenses 3,176 1,049 3,008 Income tax payable (372) 1,136 (2,430) - -------------------------------------------------------------------------------- Net cash provided by operations 27,381 26,545 14,010 - -------------------------------------------------------------------------------- Investing activities: Purchase of property and equipment, net (24,707) (16,700) (14,371) Purchase of intangible assets (3,842) (3,873) (9,907) (Purchase), sale or maturity of short-term investments (685) 1,094 2,211 - -------------------------------------------------------------------------------- Net cash used in investing activities (29,234) (19,479) (22,067) - -------------------------------------------------------------------------------- Financing activities: Proceeds from borrowings -- -- 6,900 Principal payments on debt (1,419) (1,373) (1,228) Dividends paid (6,484) (4,681) (3,746) Proceeds from exercise of stock options and stock purchase plan 4,913 2,366 1,159 - -------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (2,990) (3,688) 3,085 - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,843) 3,378 (4,972) Cash and cash equivalents at beginning of year 39,798 36,420 41,392 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of year $34,955 $39,798 $36,420 ================================================================================ The accompanying notes are an integral part of the consolidated financial statements. F-5 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARBOR DRUGS, INC. AND SUBSIDIARIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The preparation of these consolidated financial statements, in order to be presented in conformity with generally accepted accounting principles, requires that management use estimates and assumptions regarding events anticipated and transpired, together with their potential effects upon the reported amounts of assets and liabilities, as well as the disclosures and assessments of contingent assets and liabilities, at the date of the financial statements, and in determining the reported amounts of revenues, costs and expenses of the reporting periods. Actual results could differ from those estimates. STOCK REPURCHASE PLAN On July 25, 1996, the Board of Directors authorized management to repurchase up to one million shares of the Company's common stock in the open market, at prices acceptable to management. Shares purchased under the program will be retired. No shares have been purchased to date. BASIS OF OPERATION The consolidated financial statements include Arbor Drugs, Inc. ("Company") and its subsidiaries, whose primary business activity is the operation of drugstores, principally in southeastern Michigan. All significant intercompany transactions have been eliminated in consolidation. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Short-term investments include all liquid investments with a maturity greater than three months and are stated at cost, which approximates market. RECEIVABLES The Company has contractual arrangements with third-party providers of insurance, enabling the Company to obtain reimbursement from these carriers for prescription services performed by the Company for benefit of its customers. Consequently, significant revenue and accounts receivable result from these arrangements. INVENTORY VALUATION Inventories are stated at the lower of cost or market assuming a last-in, first-out cost flow. Had the first-in, first-out method for determining cost been used, inventories would have been increased by approximately $25,607,000 and $22,814,000 at July 31, 1996 and 1995, respectively. PROPERTY AND EQUIPMENT All property and equipment are recorded at cost. Maintenance and repair costs are charged to expense as incurred. Upon retirement or disposal, the asset cost and related accumulated depreciation are eliminated from the respective accounts and the resulting gain or loss is included in the results of operations for the period. DEPRECIATION Depreciation is computed using primarily the straight-line method based on the following range of estimated useful lives: Buildings ....................................40 years Furniture, fixtures and equipment and land improvements........................5 to 20 years Leasehold improvements .......................Lesser of lease term or useful lives, ranging from 5 to 20 years INCOME TAX Deferred tax assets and liabilities are recognized for temporary differences at the tax rate expected to be in effect when the related asset is recovered or the related liability is settled. PREOPENING EXPENSES Preopening expenses of retail drugstores are charged to income as incurred. ADVERTISING Advertising production costs are expensed the first time the related advertising takes place. Advertising expense for the years ended July 31, 1996, 1995 and 1994 was approximately $15,146,000, $14,774,000 and $13,079,000, respectively. STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation," was issued in October 1995, with an effective date for fiscal years beginning in 1996, accordingly, the Company has yet to adopt the provisions promulgated therein. It is the Company's intent that, when adopted, such compensation will continue to be measured using the intrinsic value method, in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." F-6 24 2. INTANGIBLE ASSETS: Intangible assets consist of the following: July 31, 1996 1995 ---------------------------------------------------------------------- (Dollars in thousands) Prescription customer files $19,026 $19,767 Leaseholds 3,091 3,631 Developed software 5,067 4,883 Other 12,274 10,895 ---------------------------------------------------------------------- 39,458 39,176 Less accumulated amortization 18,321 17,410 ---------------------------------------------------------------------- $21,137 $21,766 ====================================================================== Prescription customer files and other intangible assets consist primarily of amounts, other than leaseholds, allocated upon the purchase of assets of existing retail operations and are generally amortized over a period not to exceed 15 years. Leaseholds represent the amounts paid for, or allocated to, beneficial lease agreements assumed by the Company upon purchase of assets of existing retail operations or leases. Amortization is recorded using the straight-line method over the term of the related lease agreement. All intangible assets are evaluated for potential impairment of value on an on-going basis. Such evaluations consider current, as well as anticipated, operating results, measured on the basis of undiscounted cash flows, of the operation relative to the asset. Usefulness of the underlying asset in the operation of the Company is also a basis of evaluation. Additionally, trends and other circumstances are used in such evaluations and estimates. 3. NOTES PAYABLE: Approximate fair market values are as follows:
July 31, 1996 1995 - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) Mortgage note payable, interest at 8.75 percent, monthly interest and principal installments of $60,976 through July 1, 2014 $ 6,634 $ 6,778 Senior note, interest at 9.93 percent, semiannual interest and $500,000 principal payments, final payment due October 31, 1997 3,500 4,500 Mortgage note payable, interest at 9.68 percent, monthly interest and principal installments of $62,298 through July 1, 2012 6,071 6,223 Line of credit term loan, interest at 7.16 percent, quarterly interest only payments, due December 15, 1997 1,500 1,500 Mortgage note payable, interest at 8.49 percent, monthly interest and principal installments of $42,926 through December 1, 2012 4,554 4,677 Other borrowings 111 111 - ------------------------------------------------------------------------------------------------------- 22,370 23,789 Less current portion 1,568 1,529 - ------------------------------------------------------------------------------------------------------- $20,802 $22,260 =======================================================================================================
As of July 31, 1996, the Company had a $50 million line of credit with an outstanding balance of $1.5 million. This credit facility expires November 30, 2001. Maturities of notes payable for the next five fiscal years are approximately as follows: 1997 ........$1,458,000 1998 ........$4,501,000 1999 ........$ 548,000 2000 ........$ 600,000 2001 ........$ 656,000
The senior note, term loan and line of credit agreement contain certain covenants, the most restrictive of which require the Company to maintain minimum current, debt service and equity ratios and maintain a minimum amount of net worth. Certain property has been pledged as collateral under terms of the mortgage notes payable. Interest costs capitalized for the years ended July 31, 1996, 1995 and 1994 were approximately $552,000, $328,000 and $264,000, respectively. Cash paid for interest, net of capitalized interest, was approximately $1,646,000, $2,232,000 and $1,700,000 for the years ended July 31, 1996, 1995 and 1994, respectively. 4. RENTAL EXPENSE AND LEASE COMMITMENTS: The Company leases certain facilities, transportation, data processing and photo development equipment under operating lease agreements expiring on various dates through the year 2020. In addition to minimum rentals, certain lease agreements provide for contingent rental payments based upon attainment of specified F-7 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED sales volume or increases in the consumer price index. Most leases contain renewal options for periods ranging from 5 to 30 years. The following are summaries of rental expense and the future minimum annual rental payments required under all operating leases: Year Ended July 31, 1996 1995 ----------------------------------------------------------------------------- (Dollars in thousands) Rental expense: Minimum rentals $16,974 $14,848 Contingent rentals 1,846 1,574 ----------------------------------------------------------------------------- $18,820 $16,422 ============================================================================= Minimum annual rentals: Year ending July 31: 1997 $ 21,388 1998 22,361 1999 21,447 2000 19,178 2001 17,452 Remaining lease term 191,719 ----------------------------------------------------------------------------- $293,545 ============================================================================= Accrued rent of $6,835,000 and $5,781,000 is included in accrued expenses as of July 31, 1996 and 1995, respectively. 5. EMPLOYEE RETIREMENT PLANS: The Company maintains an employee savings plan, pursuant to section 401(k) of the Internal Revenue Code. Eligible participating employees may contribute up to 15 percent of their salaries, subject to certain limitations, for investment in either the common stock of the Company or various other investment options. Contributions by the Company are discretionary. 6. INCOME TAX: The provision for federal income tax consists of the following: Year Ended July 31, 1996 1995 1994 ----------------------------------------------------------------------------- (Dollars in thousands) Currently payable $13,708 $10,745 $6,112 Deferred 304 1,126 3,734 ----------------------------------------------------------------------------- $14,012 $11,871 $9,846 ============================================================================= The provision for deferred income tax is attributed to the tax effect of differences caused by the timing of expense and revenue recognition, between financial statement and tax accounting, for certain transactions, at the tax rates expected to be in effect when the related asset is recovered or liability is settled. These differences are primarily attributed to the following: July 31, 1996 1995 ----------------------------------------------------------------------------- (Dollars in thousands) Vendor agreement discounts $ 832 $ 130 Depreciation and amortization (251) 291 Provision for third-party settlements -- 1,750 ----------------------------------------------------------------------------- The provision for income tax, as a percentage of income before tax, was 34.1 percent, 34.0 percent and 41.2 percent in 1996, 1995 and 1994, respectively. These rates differ from the statutory rate due to: In 1996 and 1995, income earned on tax-exempt investments reduced the provision by approximately $300,000. In 1994, the provision reflects the Company's preliminary assessment that the after-tax effect of the Company's settlement with the United States and the State of Michigan will be approximately $6.1 million. Also, income earned on tax-exempt investments reduced the provision by approximately $255,000. Prepaid expenses include the current portion of deferred income taxes of $1,790,000 and $2,494,000 in 1996 and 1995, respectively. Cash paid for income taxes was approximately $12,738,000, $8,800,000 and $8,135,000 in 1996, 1995 and 1994, respectively. F-8 26 7. STOCK OPTION AND STOCK PURCHASE PLANS: Under the Company's 1986 and 1996 Stock Option Plans, certain of the Company's key employees have been granted nonqualified stock options which allow the employee to purchase shares of common stock at prices equal to market value at the date of grant and become exercisable 12 months after grant, on a pro rata basis, over a five-year period. There were approximately 1,198,000 shares exercisable at July 31, 1996. The Company is currently authorized to grant options to purchase up to an aggregate of 5,806,250 shares of its common stock, of which 4,366,001 shares have been granted and 3,340,469 shares were outstanding as of July 31, 1996. Stock option transactions are summarized as follows.
Number of Shares Option Price Range ------------------------------------------------------------------------------------------------- Balance, July 31, 1993 1,618,777 $2.67-15.83 Granted 640,426 10.83-12.50 Terminated (19,500) 8.33-15.83 Exercised (145,980) 2.67-11.67 ------------------------------------------------------------------------------------------------- Balance, July 31, 1994 2,093,723 $4.00-15.83 Granted 985,351 13.03-15.17 Terminated (17,445) 8.33-15.83 Exercised (196,284) 4.00-13.17 ------------------------------------------------------------------------------------------------- Balance, July 31, 1995 2,865,345 $6.05-15.83 Granted 738,000 16.25-17.50 Terminated (47,150) 11.67-17.50 Exercised (215,726) 7.45-15.83 ------------------------------------------------------------------------------------------------- Balance, July 31, 1996 3,340,469 $6.05-17.50 =================================================================================================
The Company has an Employee Stock Purchase Plan where employees may subscribe, through payroll withholdings, to purchase shares of the Company's common stock at the lower of 85% of market value at the beginning or end of each calendar quarter. Employees may not purchase in excess of 15% of gross pay under the plan, or 25% of gross pay in combination with withholdings under the 401(k) plan. Transactions under the Employee Stock Purchase Plan are summarized as follows:
Number of Shares Issue Price Range - ---------------------------------------------------------------------------------------------------- Shares issued during the year ended July 31, 1996 101,828 $14.025-17.80 1995 45,715 $13.600-17.53 ====================================================================================================
8. QUARTERLY FINANCIAL SUMMARY (UNAUDITED):
(Dollars in thousands, except per share data) For the Three Months Ended ----------------------------------------------------------------------------------------------- Fiscal Year OCT. 31, JAN. 31, APRIL 30, JULY 31, 1996 1995 1996 1996 1996 ----------------------------------------------------------------------------------------------- Net sales $190,704 $214,501 $208,242 $212,683 Gross profit 49,449 56,232 53,560 54,965 Net income 5,125 8,711 6,057 7,131 Earnings per share $ .21 $ .35* $ .24 $ .28 =============================================================================================== For the Three Months Ended ----------------------------------------------------------------------------------------------- Fiscal Year OCT. 31, JAN. 31, APRIL 30, JULY 31, 1995 1994 1995 1995 1995 ----------------------------------------------------------------------------------------------- Net sales $167,340 $185,134 $174,806 $179,870 Gross profit 43,842 48,630 45,793 47,178 Net income 4,709 7,488 5,230 5,640 Earnings per share $ .19 $ .30 $ .21 $ .23 ===============================================================================================
Amounts may not total due to rounding. *Earnings per share, assuming full dilution, were $.34. F-9 27 ARBOR DRUGS, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ----------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------- -------- -------- -------- -------- BALANCE AT CHARGES CHARGES TO BALANCE BEGINNING TO COST/ OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------- --------- --------- ---------- ---------- --------- Year End July 31, 1996: ======================= Allowance For Doubtful Accounts $ 543,390 $ 366,537 - $ 209,223 $ 700,704 Year End July 31, 1995: ======================= Allowance For Doubtful Accounts $1,018,510 $ 212,817 - $ 687,937 $ 543,390 Year End July 31, 1994: ======================= Allowance For Doubtful $1,014,652 $ 236,526 - $ 232,668 $1,018,510 Accounts
F-12 28 INDEX TO EXHIBITS 3.1 Restated Articles of Incorporation, as amended, filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1988, are incorporated herein by reference. 3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4378), are incorporated herein by reference. 4.0 Credit Agreement (the "Credit Agreement") dated as of May 14,1992 among Arbor Drugs, Inc., NBD Bank, N.A., Manufacturers Bank, N.A., Continental Bank N.A., and NBD Bank, N.A., as Agent, filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1992, is incorporated herein by reference. 4.0A Letter, dated June 2, 1994, from NBD Bank, N.A. (in its capacity as a Bank and as Agent), Continental Bank, N.A. and Comerica Bank to Arbor Drugs, Inc., filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1994, is incorporated herein by reference. 4.0B First Amendment to Credit Agreement, dated as of August 29, 1994, among Arbor Drugs, Inc., NBD Bank, N.A. (in its capacity as a Bank and as Agent), Continental Bank, N.A. and Comerica Bank, filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1994, is incorporated herein by reference. 4.1 The Registrant undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. 10.1 Amended and restated Arbor Drugs, Inc. Stock Option Plan, dated June 4, 1993, filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1993, is incorporated herein by reference. 10.2 Arbor Drugs, Inc. 1996 Stock Option Plan, filed as Annex 1 to the Registrant's Proxy Statement for its 1995 Annual Meeting of Shareholders, is incorporated herein by reference. 11. Computation of Earnings Per Share. 21. Subsidiaries of The Registrant. 23.1 Consent of Coopers & Lybrand L.L.P., independent accountants. 27. Financial Data Schedule. EX-11 2 COMPUTATION OF EARNINGS 1 EXHIBIT 11 ARBOR DRUGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Year Ended (In thousands, except July 31, July 31, for per share data) -------------------- -------------------------- 1996 1995 1996 1995 ----- ----- ---- ---- A. Net Income $7,131 $5,640 $27,024(a) $23,067(a) ====== ====== ======= ====== Weighted average number of common shares outstanding 25,064 24,746 24,944(a) 24,646(a) 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 590 421 640 332 ------ ------ ------- ------ B. Average number of common shares and common equivalent shares for primary earnings per share 25,654 25,167 25,584 24,978 ====== ====== ======= ====== Weighted average number of common shares outstanding 25,064 24,746 24,944(a) 24,646(a) 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 590 440 640 443 common shares during ------ ------ ------- ------ the period, using the treasury stock method. C. Average number of common shares and common equivalent shares for fully diluted earnings per share. 25,654 25,186 25,584 25,089 ====== ====== ======= ====== Primary earnings per share A $0.28 $0.22 $1.06 $0.92(b) B ====== ====== ======= ====== Fully diluted earnings per share A $0.28 $0.22 $1.06 $0.92(b) C ====== ====== ======= ====== (a) These amounts agree with the related amounts in the Consolidated Statements of Income. (b) The actual difference between reported earnings per share and both primary earnings per share and fully diluted earnings per share is less than $.02, but due to rounding, is shown as presented.
EX-21 3 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
List of Subsidiary Corporations State Of Incorporation - --------------------------------------------------------- ---------------------- Arbor Drugs - Civic Incorporated Michigan A.D.I. Realty, Incorporated Michigan Children's Hospital of Michigan Outpatient Pharmacy, Inc. (51% owned) Michigan Medical Center Pharmacies, Inc. (51% owned) Michigan Richard Investment Company Michigan E.F. Mile Corporation Michigan Pharmacy Advisory Company Michigan
All subsidiaries conduct business using the names above. EX-23.1 4 CONSENT 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Arbor Drugs, Inc. on Form S-8 (File Nos. 33-11830, 33-54141, 33-56109, 33-39259, 33-13102 and 333-13433) of our report dated September 27, 1996, on our audits of the consolidated financial statements and financial statement schedule of Arbor Drugs, Inc. and Subsidiaries as of July 31, 1996 and 1995, and for the years ended July 31, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. - ------------------------------ Detroit, Michigan October 17, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUL-31-1996 AUG-01-1995 JUL-31-1996 34,955 855 17,507 0 106,283 163,449 146,717 57,598 273,705 70,515 20,802 0 0 251 175,918 273,705 826,130 826,130 611,924 611,924 0 0 1,654 41,036 14,012 27,024 0 0 0 27,024 1.08 1.08
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