<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 November 6, 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
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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 NOVEMBER 6, 1998
- ----- -------------------------------
COMMON STOCK:
Class A, par value $1.00 per share 7,523,616
Class B, par value $1.00 per share 6,233,099
1
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GENOVESE DRUG STORES, INC.
--------------------------
INDEX
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PART I FINANCIAL INFORMATION PAGE
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Condensed Balance Sheets - November 6, 1998
(Unaudited) and January 30, 1998 3
Condensed Statements of Income - Twelve and Forty
Weeks Ended November 6, 1998 and November 7, 1997 (Unaudited) 4
Condensed Statements of Cash Flows - Forty Weeks Ended
November 6, 1998 and November 7, 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
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GENOVESE DRUG STORES, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
November 6, January 30,
1998 1998
----------- -----------
(Unaudited) (Note 1)
<S> <C> <C>
Assets
------
Current Assets:
Cash $ 2,656 $ 2,487
Receivables 21,738 20,340
Merchandise Inventory 128,060 116,046
Prepaid expenses and other 2,510 6,361
-------- --------
Total Current Assets 154,964 145,234
Property and Equipment, net 86,466 85,475
Other Assets 13,051 11,280
-------- --------
Total Assets $254,481 $241,989
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable, accrued expenses and other $ 95,673 $ 90,208
Current portion of long-term debt 1,022 1,022
-------- --------
Total Current Liabilities 96,695 91,230
Long-Term Liabilities 74,722 72,713
Deferred Income Taxes Payable 4,198 4,198
-------- --------
Total Liabilities 175,615 168,141
-------- --------
Stockholders' Equity 78,866 73,848
-------- --------
Total Liabilities and Stockholders' Equity $254,481 $241,989
======== ========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
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GENOVESE DRUG STORES, INC.
CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
------------------------- -------------------------
November 6, November 7, November 6, November 7,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 190,829 $ 175,246 $ 621,213 $ 575,219
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of merchandise sold 137,224 126,185 449,289 415,195
Selling, general and administrative expenses 48,095 47,191 156,106 150,817
----------- ----------- ----------- -----------
185,319 173,376 605,395 566,012
----------- ----------- ----------- -----------
Operating Profit 5,510 1,870 15,818 9,207
Interest Expense 1,011 952 3,407 2,761
----------- ----------- ----------- -----------
Income Before Income Taxes 4,499 918 12,411 6,446
Income Taxes 1,971 401 5,436 2,817
----------- ----------- ----------- -----------
Net Income $ 2,528 $ 517 $ 6,975 $ 3,629
=========== =========== =========== ===========
Net Income Per Common Share (a)
Basic $ .18 $ .04 $ .51 $ .27
=========== =========== =========== ===========
Diluted $ .18 $ .04 $ .50 $ .26
=========== =========== =========== ===========
Average Number of Common Shares Outstanding (a)
Basic 13,756,000 13,661,000 13,740,000 13,620,000
=========== =========== =========== ===========
Diluted 14,063,000 13,968,000 14,072,000 13,901,000
=========== =========== =========== ===========
Cash Dividends Paid Per Common Share (a) $ .07 $ .06 $ .21 $ .18
=========== =========== =========== ===========
</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
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GENOVESE DRUG STORES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Forty Weeks Ended
--------------------------
November 6, November 7,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 6,975 $ 3,629
Adjustments to reconcile net income to net
Cash provided by (used for) operating activities
Depreciation and amortization 12,427 10,221
Provision for LIFO inventory valuation 1,600 1,600
Provision for deferred taxes -- (2,600)
Provision for other noncash expenses (330) 39
Changes in certain assets and liabilities:
Receivables (976) 2,120
Merchandise inventory (13,614) (17,148)
Prepaid expenses and other 3,851 2,497
Other assets (3,787) (4,472)
Other long term liabilities (132) 6,006
Accounts payable, accrued expenses and other 6,326 (4,373)
----------- -----------
Net cash provided by (used for) operating activities 12,340 (2,481)
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment, net (12,263) (16,741)
Net proceeds from the sale of the Living Color photo processing lab -- 3,952
----------- -----------
Net cash used for investing activities (12,263) (12,789)
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Cash Flows From Financing Activities:
Net increase in bank borrowings 3,000 18,000
Repayments of long-term debt (859) (744)
Issuance of Common Stock - Employee Stock Option
and Appreciation Rights Plan 1,094 1,352
Treasury stock purchased (258) (1,100)
Payment of cash dividends (2,885) (2,478)
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Net cash provided by financing activities 92 15,030
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Net increase/(decrease) in cash 169 (240)
Cash at Beginning of Period 2,487 2,368
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Cash at End of Period $ 2,656 $ 2,128
=========== ===========
Supplemental Disclosure:
Interest paid $ 3,266 $ 2,786
=========== ===========
Income taxes paid $ 2,131 $ 7,118
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
5
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GENOVESE DRUG STORES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. The condensed balance sheet as of November 6, 1998, the condensed
statements of income for the twelve and forty week periods ended
November 6, 1998 and November 7, 1997 and the condensed statements of
cash flows for the forty week periods ended November 6, 1998 and
November 7, 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
November 6, 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 forty week periods ended
November 6, 1998 and November 7, 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 November 6, 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 November 24, 1998, the Company announced that it had entered into a
definitive agreement under which it will be acquired by J.C. Penney
Company, Inc. in an exchange of common stock.
5. On November 22, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per common share payable on January 4, 1999 to holders
of record as of December 18, 1998.
6. During the forty weeks ended November 7, 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
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE TWELVE AND FORTY WEEKS ENDED NOVEMBER 6, 1998
- -----------------------------------------------------
Sales increased 8.9% for the third quarter and 8.0% for the forty week period
ended November 6, 1998. On a comparable store basis, sales increased 6.5% for
the quarter and 5.2% for the year to date. The sales increases were led by
pharmacy sales which increased 17.1%, during the quarter and 15.6% for the year
to date.
During the third quarter, pharmacy sales represented 44.2% of total sales versus
41.2% in the corresponding period last year. For the forty weeks ended November
6, 1998, pharmacy sales represented 43.4% of total sales versus 40.6% last year.
Cost of merchandise sold, expressed as a percentage of sales, decreased to 71.9%
during the third quarter from 72.0% last year. During the forty weeks ended
November 6, 1998, cost of goods sold was 72.3% of sales versus 72.2% in the
corresponding period last year.
Selling, general and administrative expenses expressed as a percentage of sales
decreased to 25.2% from 26.9% during the third quarter and to 25.1% from 26.2%
for the forty week period.
Interest expense increased to $1,011,000 from $952,000 during the third quarter
and to $3,407,000 from $2,761,000 for the year to date. The increase for the
year to date is primarily a result of higher interest rates and higher average
borrowings during the first half of the year.
Net income increased to $2,528,000 from $517,000 for the third quarter and
$6,975,000 from $3,629,000 for the forty weeks. On a diluted per common share
basis, earnings were $.18 versus $.04 for the quarter and $.50 versus $.26 for
the year to date.
FINANCIAL CONDITION
- -------------------
The Company's operating, investing and financing activities for the forty weeks
ended November 6, 1998 resulted in an increase in net cash of $169,000 as
follows:
o Operating activities generated $12,340,000, primarily due to cash
provided by operations, and an increase in accounts payable and accrued
expenses, partially offset by an increase in merchandise inventory.
o Investing activities utilized $12,263,000 for the purchase of property
and equipment.
o Financing activities provided $92,000 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 November 6, 1998 was $58.3 million. The working capital ratio
at November 6, 1998 was 1.60 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 November 6, 1998, the
Company had $33 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 future 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
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This 10-Q contains "forward looking statements" based on the Registrant's
current plans and expectations, which involve risk and uncertainties. Actual
results or achievements may be materially different. The Registrant's plans and
expectations are based on assumptions involving judgements with respect to
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Registrant. The Registrant's
experience under third party prescription reimbursement plans will be subject to
industry trends in managed care, and the nature, timing and frequency of
amendments, modifications, or expirations of such agreements. Therefore, there
can be no assurance that the forward looking statements will prove to be
accurate. The Registrant undertakes no obligation to revise its forward looking
statements to reflect events or circumstances after the date hereof.
******
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
The following exhibits are included herein:
(11) Statement Re: Computation of Net Income Per Common Share
There were no reports on Form 8-K filed during the twelve weeks ended November
6, 1998.
Subsequent to the end of the quarter, on November 24, 1998, the Registrant filed
a report on Form 8-K announcing that the Registrant had signed a definitive
agreement with J.C. Penney Company, Inc. under which J.C. Penney will acquire
the Registrant in an exchange of common stock.
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: December 14, 1998 By: /s/ Christopher D. Noonan
----------------- ---------------------------------------
Christopher D. Noonan
Vice President & Chief Financial Officer
8
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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 Forty Weeks Ended
------------------------- -------------------------
November 6, November 7, November 6, November 7,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding (a) 13,756 13,661 13,740 13,620
Equivalent shares - dilutive stock bonus (a) 27 70 27 70
Equivalent shares - dilutive stock options (a) 280 237 305 211
----------- ----------- ----------- -----------
Dilutive shares outstanding (a) 14,063 13,968 14,072 13,901
=========== =========== =========== ===========
Net income $ 2,528 $ 517 $ 6,975 $ 3,629
=========== =========== =========== ===========
Net income per common share (a) - Basic $ .18 $ .04 $ .51 $ .27
=========== =========== =========== ===========
Net income per common share (a) - Diluted $ .18 $ .04 $ .50 $ .26
=========== =========== =========== ===========
</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> OTHER
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-START> JAN-31-1998
<PERIOD-END> NOV-6-1998
<CASH> 2,656
<SECURITIES> 0
<RECEIVABLES> 21,738
<ALLOWANCES> 0
<INVENTORY> 128,060
<CURRENT-ASSETS> 154,964
<PP&E> 172,504
<DEPRECIATION> (87,866)
<TOTAL-ASSETS> 254,481
<CURRENT-LIABILITIES> 96,695
<BONDS> 58,082
<COMMON> 13,825
0
0
<OTHER-SE> 65,041
<TOTAL-LIABILITY-AND-EQUITY> 254,481
<SALES> 621,213
<TOTAL-REVENUES> 621,213
<CGS> 449,289
<TOTAL-COSTS> 449,289
<OTHER-EXPENSES> 156,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,407
<INCOME-PRETAX> 12,411
<INCOME-TAX> 5,436
<INCOME-CONTINUING> 6,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,975
<EPS-PRIMARY> .51
<EPS-DILUTED> .50
</TABLE>
