<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 14, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ___________
Commission file number 1-7623
GENOVESE DRUG STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-1556812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Marcus Drive, Melville, New York 11747
(Address of principal executive offices)
(Zip Code)
(516) 420-1900
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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 close of the period covered by this report.
CLASS OUTSTANDING AT AUGUST 14, 1998
COMMON STOCK:
Class A, par value $1.00 per share 7,440,069
Class B, par value $1.00 per share 6,316,005
<PAGE>
GENOVESE DRUG STORES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Condensed Balance Sheets - August 14, 1998
(Unaudited) and January 30, 1998 3
Condensed Statements of Income - Twelve and
Twenty-eight Weeks Ended August 14, 1998 and
August 15, 1997 (Unaudited) 4
Condensed Statements of Cash Flows -
Twenty-eight Weeks Ended August 14, 1998
and August 15, 1997 (Unaudited) 5
Notes to Unaudited Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION AND SIGNATURE 8
EXHIBIT 11 Statement Re: Computation of Net Income Per
Common Share 9
2
<PAGE>
GENOVESE DRUG STORES, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
August 15, January 30,
1998 1998
----------------- -------------
(Unaudited) (Note 1)
Assets
------
<S> <C> <C>
Current Assets:
Cash $ 3,377 $ 2,487
Receivables 22,362 20,340
Merchandise Inventory 113,762 116,046
Prepaid expenses and other 3,055 6,361
----------------- -------------
Total Current Assets 142,556 145,234
Property and Equipment, net 85,210 85,475
Other Assets 12,445 11,280
----------------- -------------
Total Assets $ 240,211 $ 241,989
================= =============
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities:
Accounts payable, accrued expenses and other $ 83,185 $ 90,208
Current portion of long-term debt 1,022 1,022
----------------- -------------
Total Current Liabilities 84,207 91,230
Long-Term Liabilities 74,533 72,713
Deferred Income Taxes Payable 4,198 4,198
----------------- -------------
Total Liabilities 162,938 168,141
----------------- -------------
Stockholders' Equity 77,273 73,848
----------------- -------------
Total Liabilities and Stockholders' Equity $ 240,211 $ 241,989
================= =============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
<PAGE>
GENOVESE DRUG STORES, INC.
CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------------------------
August 14, August 15,
1998 1997
--------------- ---------------
<S> <C> <C>
Sales $ 186,515 $ 173,067
--------------- ---------------
Costs and Expenses:
Cost of merchandise sold 134,084 123,895
Selling, general and administrative expenses 47,499 46,095
--------------- ---------------
181,583 169,990
--------------- ---------------
Operating Profit 4,932 3,077
Interest Expense 1,030 797
--------------- ---------------
Income Before Income Taxes 3,902 2,280
Income Taxes 1,709 997
--------------- ---------------
Net Income $ 2,193 $ 1,283
--------------- ---------------
Net Income Per Common Share (a)
Basic $ .16 $ .09
--------------- ---------------
Diluted $ .16 $ .09
--------------- ---------------
Average Number of Common Shares Outstanding (a)
Basic 13,756,000 13,637,000
--------------- ---------------
Diluted 14,063,000 13,963,000
--------------- ---------------
Cash Dividends Paid Per Common Share (a) $ .07 $ .06
--------------- ---------------
<CAPTION>
Twenty-Eight Weeks Ended
-----------------------------------------
August 14, August 15,
1998 1997
---------------- ----------------
<S> <C> <C>
Sales $ 430,384 $ 399,973
---------------- ----------------
Costs and Expenses:
Cost of merchandise sold 312,065 289,010
Selling, general and administrative expenses 108,011 103,626
---------------- ----------------
420,076 392,636
---------------- ----------------
Operating Profit 10,308 7,337
Interest Expense 2,396 1,809
---------------- ----------------
Income Before Income Taxes 7,912 5,528
Income Taxes 3,465 2,416
---------------- ----------------
Net Income $ 4,447 $ 3,112
---------------- ----------------
Net Income Per Common Share (a)
Basic $ .32 $ .23
---------------- ----------------
Diluted $ .32 $ .22
---------------- ----------------
Average Number of Common Shares Outstanding (a)
Basic 13,734,000 13,602,000
---------------- ---------------
Diluted 14,061,000 13,880,000
---------------- ---------------
Cash Dividends Paid Per Common Share (a) $ .14 $ .12
---------------- ----------------
</TABLE>
(a) Adjusted, where appropriate, to retroactively reflect the effect of a 10
percent stock dividend distributed on January 14, 1998.
See accompanying notes to unaudited condensed financial statements.
4
<PAGE>
GENOVESE DRUG STORES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Eight Weeks Ended
-----------------------------------
August 14, August 15,
1998 1997
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 4,447 $ 3,112
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Depreciation and amortization 8,763 6,937
Provision for LIFO inventory valuation 1,600 1,600
Provision for deferred taxes - ( 2,600 )
Provision for other noncash expenses 92 39
Changes in certain assets and liabilities:
Receivables ( 2,022 ) 2,463
Merchandise inventory 684 1,434
Prepaid expenses and other 3,306 1,943
Other assets ( 2,599 ) ( 3,080 )
Other long term liabilities ( 165 ) 5,900
Accounts payable, accrued expenses and other ( 6,162 ) ( 14,194 )
---------------- -----------------
Net cash provided by (used for) operating activities 7,944 3,554
---------------- -----------------
Cash Flows From Investing Activities:
Purchase of property and equipment, net ( 7,925 ) ( 11,476 )
Net proceeds from the sale of the Living Color photo processing lab - 3,952
---------------- -----------------
Net cash used for investing activities ( 7,925 ) ( 7,524 )
---------------- -----------------
Cash Flows From Financing Activities:
Net increase in bank borrowings 2,500 6,000
Repayments of long-term debt ( 515 ) ( 529 )
Issuance of Common Stock - Employee Stock Ownership
and Appreciation Rights Plan 1,063 1,308
Treasury stock purchased ( 255 ) ( 1,090 )
Payment of cash dividends ( 1,922 ) ( 1,608 )
---------------- -----------------
Net cash provided by financing activities 871 4,081
---------------- -----------------
Net Increase in Cash 890 111
Cash at Beginning of Period 2,487 2,368
---------------- -----------------
Cash at End of Period $ 3,377 $ 2,479
================ =================
Supplemental Disclosure:
Interest paid $ 2,260 $ 1,788
================ =================
Income taxes paid $ 1,011 $ 7,033
================ =================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
5
<PAGE>
GENOVESE DRUG STORES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. The condensed balance sheet as of August 14, 1998, the condensed statements
of income for the twelve and twenty-eight week periods ended August 14,
1998 and August 15, 1997 and the condensed statements of cash flows for the
twenty-eight week periods ended August 14, 1998 and August 15, 1997 have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X by the Company without audit. The balance
sheet as of January 30, 1998 was derived from the audited balance sheet
included in the Company's Annual Report on Form 10-K. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial condition, results
of operations and cash flows at August 14, 1998 and for the periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended January 30, 1998.
2. The results of operations for the twelve and twenty-eight week periods
ended August 14, 1998 and August 15, 1997 are not necessarily indicative of
the results to be expected for the full year.
3. Merchandise inventory is valued at the lower of cost or market, cost being
determined by the last in first out (LIFO) method. LIFO inventory costs are
determined at the end of each fiscal year when inflation rates are
finalized. Therefore, LIFO inventory costs and cost of merchandise sold for
interim periods are estimated and adjusted based on periodic physical
inventories. At August 14, 1998 and January 30, 1998, inventories would
have been greater by $20,000,000 and $18,400,000, respectively, if they had
been valued at replacement costs.
4. On September 9, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per common share payable on October 5, 1998 to holders of
record as of September 25, 1998.
5. During the twenty-eight weeks ended August 15, 1997, the Company sold the
assets of its Living Color photo processing plant. Simultaneously with the
sale of the processing plant, the company entered into an agreement whereby
the Company will outsource all of its out of store photofinishing.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINACIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE TWELVE AND TWENTY-EIGHT WEEKS ENDED AUGUST 14, 1998
Sales increased 7.8% for the second quarter and 7.6% for the first half. On a
comparable store basis, sales increased by 5.7% for the quarter and 4.8% for
the half. The sales increases were led by pharmacy sales which increased
16.8%, during the quarter and 14.9% for the half.
During the second quarter, pharmacy sales represented 43.0% of total sales
versus 39.7% in the corresponding period last year. For the first half,
pharmacy sales represented 43.0% of total sales versus 40.4% last year.
Cost of merchandise sold, expressed as a percentage of sales, increased to
72.5% from 72.3% during the first half and to 71.9% from 71.6% for the second
quarter. The decrease in gross profit percentage is primarily due to the
increase in pharmacy sales as a percentage of total sales.
Selling, general and administrative expenses, expressed as a percentage of
sales decreased by .8% to 25.1% during the first half and by 1.1% to 25.5% for
the second quarter. The decreases primarily were driven by controls over
payroll expense and other operating expenses.
Interest expense increased to $2,396,000 from $1,809,000 for the half and to
$1,709,000 from $997,000 for the quarter. The increases were caused by higher
borrowing levels and higher interest rates.
Net income increased to $4,447,000 from $3,112,000 for the first half and to
$2,193,000 from $1,283,000 for the quarter. On a per share basis, diluted
earnings per share were $.32 for the first half versus $.22 last year and $.16
for the second quarter versus $.09 in the prior year.
FINANCIAL CONDITION
The Company's operating, investing and financing activities for the
twenty-eight weeks ended August 14, 1998 resulted in an increase in net cash
of $890,000 as follows:
o Operating activities provided $7,944,000, primarily due to cash generated
by operations and a decrease in merchandise inventory and prepaid expenses
offset by increases in receivables and other assets and a decrease in
accounts payable and accrued expenses.
o Investing activities utilized $7,925,000 for the purchase of property and
equipment.
o Financing activities provided $871,000 primarily due to increased
bank borrowings and issuance of common stock through the exercise of stock
options partially offset by the payment of cash dividends.
Working capital at August 14, 1998 was $58.3 million. The working capital
ratio at August 14, 1998 was 1.69 to 1.00 versus 1.59 to 1.00 at January 30,
1998.
The Company maintains a revolving term loan agreement with three banks which
allows for aggregate borrowings of $90 million. As of August 14, 1998, the
Company had $33.5 million available under the facility.
The Company anticipates that its working capital needs for the remainder of
fiscal 1999 will be satisfied through operating results and, as necessary,
through borrowings under facilities available to the Company.
YEAR 2000 COMPUTER ISSUES
What is commonly known as the "Year 2000 Issue" arises because many computer
hardware and software systems use only two digits to represent the year. As a
result, these systems and programs may not calculate dates beyond 1999, which
may cause errors in information or system failures.
With respect to its internal systems, the Registrant is taking appropriate
steps to remediate the year 2000 issues and does not expect costs of these
efforts to be material. However, the year 2000 readiness of the Registrant's
suppliers may vary. While the Registrant does not believe the year 2000
matters discussed above will have a material impact on its business, financial
condition or results of operations, it is uncertain whether or to what extent
the Registrant may be affected by such matters.
7
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Genovese Drug Stores, Inc. was held
on June 15, 1998.
(1) Each of the three nominees to the Board of Directors was elected for a
three-year term by the shareholders:
DIRECTOR CLASS B CLASS A TOTAL VOTES
(10 votes each) (1 vote each) FOR
a. Abraham Allen 62,067,290 7,198,233 69,265,513
b. Thomas M. Cooney 62,067,290 7,205,010 69,272,300
c. Leonard Genovese 62,067,290 7,202,525 69,269,815
(2) The shareholders approved an amendment to the 1984 Employee Stock Option
and Stock Appreciation Rights Plan to increase the number of shares of
Class A common stock of the Company available thereunder by 500,000 shares:
CLASS B CLASS A TOTAL
For 61,685,380 4,096,315 65,781,695
Against 250,540 328,353 578,893
Abstain 14,170 73,071 87,241
ITEM 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
None
There were no reports on Form 8-K filed during the twelve weeks ended August 14,
1998.
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.
GENOVESE DRUG STORES, INC.
-----------------------------
(Registrant)
Date: September 25, 1998 By: /s/ Christopher D. Noonan
------------------- -------------------------
Christopher D. Noonan
Vice President &
Chief Financial Officer
8
<PAGE>
GENOVESE DRUG STORES, INC.
EXHIBIT 11
STATEMENT RE: COMPUTATION OF NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
--------------------------------- ------------------------------
August 14, August 15, August 14, August 15,
1998 1997 1998 1997
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding (a) 13,756 13,637 13,734 13,602
Equivalent shares - dilutive stock bonus (a) 27 70 27 70
Equivalent shares - dilutive stock options (a) 280 256 300 208
--------- --------- --------- ---------
Dilutive shares outstanding (a) 14,063 13,963 14,061 13,880
========= ========= ========= =========
Net income $ 2,193 $ 1,283 $ 4,447 $ 3,112
========= ========= ========= =========
Net income per common share (a) - Basic $ .16 $ .09 $ .32 $ .23
========= ========= ========= =========
Net income per common share (a) - Diluted $ .16 $ .09 $ .32 $ .22
========= ========= ========= =========
</TABLE>
(a) Adjusted, where appropriate, to retroactively reflect the effect of a 10
percent stock dividend distributed on January 14, 1998.
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-START> JAN-31-1998
<PERIOD-END> AUG-14-1998
<CASH> 3,377
<SECURITIES> 0
<RECEIVABLES> 22,362
<ALLOWANCES> 0
<INVENTORY> 113,762
<CURRENT-ASSETS> 142,556
<PP&E> 169,767
<DEPRECIATION> 84,557
<TOTAL-ASSETS> 240,211
<CURRENT-LIABILITIES> 84,207
<BONDS> 74,533
<COMMON> 13,825
0
0
<OTHER-SE> 63,448
<TOTAL-LIABILITY-AND-EQUITY> 240,211
<SALES> 430,384
<TOTAL-REVENUES> 430,384
<CGS> 312,065
<TOTAL-COSTS> 312,065
<OTHER-EXPENSES> 108,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,396
<INCOME-PRETAX> 7,912
<INCOME-TAX> 3,465
<INCOME-CONTINUING> 4,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,447
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
