<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 27, 1994
/ / 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 1-8978
LONGS DRUG STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 68-0048627
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (510) 937-1170
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
----- -----
There were 20,651,984 shares of common stock outstanding as of October 27, 1994.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME
For the For the Three
Quarters Ended Quarters Ended
OCTOBER 27 October 28 OCTOBER 27 October 28
1994 1993 1994 1993
--------- --------- --------- ---------
---------(Thousands Except Per Share)--------
<S> <C> <C> <C> <C>
SALES $614,461 $597,202 $1,863,030 $1,814,527
COSTS AND EXPENSES:
Cost of merchandise sold 458,159 443,816 1,378,614 1,352,418
Operating and administrative 112,840 108,396 337,072 323,235
Occupancy 33,140 29,655 95,167 84,753
--------- --------- ---------- ----------
Total costs and expenses 604,139 581,867 1,810,853 1,760,406
--------- --------- ---------- ----------
INCOME BEFORE TAXES ON INCOME AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 10,322 15,335 52,177 54,121
TAXES ON INCOME 3,900 6,400 20,700 21,300
--------- --------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 6,422 8,935 31,477 32,821
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- -- 3,031
--------- --------- ---------- ----------
NET INCOME $ 6,422 $ 8,935 $ 31,477 $ 35,852
--------- --------- ---------- ----------
--------- --------- ---------- ----------
PER COMMON SHARE:
Earnings Before Cumulative Effect of Accounting Change $.31 $.43 $1.52 $1.59
Cumulative Effect of Accounting Change -- -- -- .15
--------- --------- ---------- ----------
EARNINGS $.31 $.43 $1.52 $1.74
--------- --------- ---------- ----------
--------- --------- ---------- ----------
DIVIDENDS $.28 $.28 $ .84 $ .84
--------- --------- ---------- ----------
--------- --------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 20,649 20,643 20,737 20,557
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-1-
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 27 October 28 January 27
1994 1993 1994
---------- ---------- ----------
---------------(Thousands)--------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 47,172 $ 23,749 $ 42,512
Pharmacy and other receivables 47,042 40,842 50,639
Merchandise inventories 299,405 297,506 280,524
Deferred income taxes 15,879 15,999 14,270
Other 2,366 -- 2,537
--------- --------- ---------
Total current assets 411,864 378,096 390,482
--------- --------- ---------
PROPERTY:
Land 80,671 71,575 77,617
Buildings and leasehold improvements 298,170 280,911 286,871
Equipment and fixtures 236,685 229,139 228,533
Beverage licenses 7,086 6,846 6,961
--------- --------- ---------
Total property--at cost 622,612 588,471 599,982
Less accumulated depreciation 220,502 192,053 199,272
--------- --------- ---------
Property--net 402,110 396,418 400,710
OTHER NON-CURRENT ASSETS 3,770 3,683 3,612
--------- --------- ---------
TOTAL $817,744 $778,197 $794,804
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $163,640 $151,613 $142,578
Employee compensation and benefits 55,980 50,852 52,065
Taxes payable 17,857 15,908 23,179
Current portion of guarantee 2,586 2,380 1,841
Other 22,974 20,704 26,838
--------- --------- ---------
Total current liabilities 263,037 241,457 246,501
--------- --------- ---------
GUARANTEE OF PROFIT SHARING PLAN DEBT 11,861 14,447 13,821
--------- --------- ---------
DEFERRED INCOME TAXES 34,625 35,971 34,875
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock (20,652,000, 20,804,000,
and 20,654,000 shares outstanding) 10,327 10,402 10,327
Additional capital 108,723 106,503 104,518
Common stock contribution to Profit Sharing Plan -- -- 5,530
Guarantee of Profit Sharing Plan debt (14,447) (16,827) (15,662)
Retained earnings 403,618 386,244 394,894
--------- --------- ---------
Total stockholders' equity 508,221 486,322 499,607
--------- --------- ---------
TOTAL $817,744 $778,197 $794,804
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
For the Three Quarters Ended
OCTOBER 27 October 28
1994 1993
----------------------------
--------(Thousands)-------
<S> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $ 1,866,588 $ 1,815,686
Payments for merchandise (1,376,433) (1,341,402)
Payments for operating, administrative, and
occupancy expenses (405,658) (377,327)
Income tax payments (24,494) (25,136)
------------ ------------
Net cash provided by operating activities 60,003 71,821
------------ ------------
INVESTING ACTIVITIES:
Payments for property additions (30,529) (47,551)
Receipts from property dispositions 765 1,287
Costs associated with acquisition of Bill's Drugs, Inc.,
net of cash acquired (see note 7) -- (437)
------------ ------------
Net cash used in investing activities (29,764) (46,701)
------------ ------------
FINANCING ACTIVITIES:
Repayment of short-term borrowings -- (10,000)
Repayment of debt assumed from Bill's Drugs, Inc. -- (4,613)
Repurchase of common stock (8,148) (2,600)
Dividend payments (17,431) (17,228)
------------ ------------
Net cash used in financing activities (25,579) (34,441)
------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 4,660 (9,321)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 42,512 33,070
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 47,172 $ 23,749
------------ ------------
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $31,477 $35,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change -- (3,031)
Depreciation and amortization 28,216 24,152
Deferred income taxes 287 2,915
Restricted stock awards 1,372 1,078
Tax benefits credited to stockholders' equity 119 143
Changes in assets and liabilities' net of effects
from acquisition of Bill's Drugs, Inc.:
Pharmacy and other receivables 3,597 1,144
Merchandise inventories (18,881) (12,396)
Other current assets 171 3,828
Current liabilities 13,645 18,136
------------ ------------
Net cash provided by operating activities $60,003 $71,821
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 27, 1994 and Three Quarters Ended October 27, 1994
<TABLE>
<CAPTION>
PROFIT GUARANTEE
COMMON STOCK SHARING OF PROFIT TOTAL
---------------- ADDITIONAL PLAN SHARING RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL CONTRIBUTIONS PLAN DEBT EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
------------------------------(Thousands)-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 28, 1993 20,413 $10,207 $ 93,697 $4,775 ($17,945) $367,477 $458,211
Net income 52,782 52,782
Dividends ($1.12 per share) (22,990) (22,990)
Profit Sharing Plan:
Issuance of stock for FY93 contributions 132 66 4,709 (4,775) 0
Stock portion of FY94 contributions 5,530 5,530
Purchase of stock from plan (121) (60) (3,965) (4,025)
Reduction of plan debt 2,283 2,283
Restricted stock awards 5 1 1,349 1,350
Tax benefits related to employee stock plans (512) 188 (324)
Repurchase of common stock (92) (46) (431) (2,563) (3,040)
Acquisition of Bill's Drugs, Inc.:
Stock issued 317 159 10,184 10,343
Related costs (513) (513)
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BALANCE AT JANUARY 27, 1994 20,654 $10,327 $104,518 $5,530 ($15,662) $394,894 $499,607
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 31,477 31,477
Dividends ($.84 per share) (17,431) (17,431)
Profit Sharing Plan:
Issuance of stock for FY94 contribution 147 74 5,456 (5,530) 0
Purchase of stock from plans (45) (23) (1,647) (1,670)
Reduction of plan debt 1,215 1,215
Restricted stock awards 90 46 1,326 1,372
Tax benefits related to employee stock plans 119 119
Repurchase of common stock (195) (98) (939) (5,441) (6,478)
Acquisition of Bill's Drugs, Inc.,
net of related costs 1 1 9 10
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BALANCE AT OCTOBER 27, 1994 20,652 $10,327 $108,723 $ 0 ($14,447) $403,618 $508,221
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- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include Longs Drug Stores Corporation
(Company) and Longs Drug Stores California, Inc., its wholly-owned
subsidiary. All intercompany accounts and transactions have been
eliminated. The statements have been prepared on a basis consistent with
the accounting policies described in the Annual Report of the Company
previously filed with the Commission on Form 10-K for the year ended
January 27, 1994, and reflect all adjustments and eliminations which are,
in management's opinion, necessary for a fair statement of the results for
the periods. The financial statements for the periods ended October 27,
1994, and October 28, 1993, are unaudited. The balance sheet at January 27,
1994, and the Statement of Stockholder's Equity for the year then ended,
presented herein, have been prepared from the audited financial statements
of the Company.
2. Certain reclassifications have been made to prior year financial statements
in order to conform to current financial statement presentation.
3. The financial statements have been prepared using the LIFO method of
accounting for inventories. The excess of specific cost inventory over LIFO
valuation was $128,600,000 at October 27, 1994, $125,000,000 at October 28,
1993, and $126,000,000 at January 27, 1994. A final valuation of inventory
under the LIFO method can be made only after year-end based on ending
inventory levels and inflation rates for the year. Interim LIFO
calculations are based on management's estimates of year-end inventory
levels and inflation rates for the year.
4. The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective January 29, 1993. This
statement requires that the liability method of accounting for income taxes
be used rather than the deferred method. The cumulative effect of adopting
SFAS No. 109 on the Company's financial statement was to increase net
income by $3,031,000 ($.15 per share) for the three quarters ended October
28, 1993.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
5. The Company repurchased 45,197 shares of its common stock from the Profit
Sharing Plan and 401(k) Plan during the three quarters ended October 27,
1994, in accordance with the stock repurchase plan adopted by the Board of
Directors in August 1989. The stock was purchased at current market values,
totalling $1,670,000.
On November 15, 1994, the Board of Directors discontinued this plan and
authorized a new plan to repurchase up to two million shares of the
Company's outstanding Common Stock in open market and privately negotiated
transactions. Purchases may be suspended or discontinued at any time.
6. The Company has a Profit Sharing Plan covering all full-time employees with
over 1,000 hours of service. The Company makes annual contributions subject
to provisions of the Plan. Company contributions are allocated to
individual employees' accounts based upon wages paid up to a $75,000 wage
maximum for each employee.
-5-
<PAGE>
In 1989, the Company sold 696,864 shares of Longs' common stock to the Plan
for $25 million. The Plan financed this purchase with a ten-year loan which
is guaranteed by Longs Drug Stores California, Inc. A Guarantee of Profit
Sharing Plan Debt is shown on the Company's balance sheets with
corresponding reduction of Stockholders' Equity. The Company considers all
shares allocated to the Plan as outstanding for Earnings per Share
calculations. Dividends on all shares are recorded as a reduction of
Retained Earnings.
Shares are released for allocation to member accounts over the ten-year
term of the loan as principal and interest payments are made. Loan
repayments are made with dividends on allocated and unallocated shares held
by the Plan and with Company contributions. Members are allocated shares of
Longs common stock equal in value to the cash dividends on their allocated
shares used to repay the loan. The Company has no obligation to repurchase
outstanding shares held by the Plan. Periodically, the Company has been
willing to repurchase shares to provide the Plan with needed liquidity.
As of
October 27, 1994
----------------
Allocated shares. . . . . . . . . . . . . . 396,379
Unallocated shares. . . . . . . . . . . . . 300,485
--------
Total Shares. . . . . . . . . . . . . . . . 696,864
--------
--------
7. In September 1993, the Company purchased (in a non-cash transaction)
substantially all of the assets of Bill's Drugs, Inc. (Bill's), a chain of
drug stores located in Northern California. The transaction was reported
under the purchase method of accounting.
Results of operations of the Bill's stores after the purchase date are
included in the Statements of Consolidated Income presented herein. The
following pro forma information assumes that the acquisition had taken
place as of the beginning of the quarter and three quarters ended October
28, 1993, and includes adjustments for additional depreciation and
amortization reflecting the fair market value of the assets acquired.
Earnings per share were computed as if the shares issued in the acquisition
of Bill's had been issued at the beginning of the periods presented. The
pro forma information is not necessarily indicative of the results of
operations as they may be in the future or as they would have been had the
transaction been effected on the assumed dates.
<TABLE>
<CAPTION>
For the For the Three
Quarter Ended Quarters Ended
October 28, 1993 Ended October 28, 1993
---------------- ----------------------
--------(Thousands Except Per Share)-------
<S> <C> <C>
Sales. . . . . . . . . . . . . . . . $609,146 $1,864,027
Income before cumulative effect
of accounting change . . . . . . . . $8,590 $31,851
Earnings per share before cumulative
effect of accounting change. . . . . $.41 $1.53
</TABLE>
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<PAGE>
8. During the first quarter of fiscal 1994, Longs announced that the states of
Hawaii and Nevada and Federal regulatory agencies were inquiring into the
procedure which Longs followed when billing Medicaid programs. The billing
procedures in question were changed in 1990 for Hawaii and 1992 for Nevada.
Longs has fully cooperated in the inquiry. Longs reached a settlement in
August of 1993 totalling $750 thousand with the state of Nevada. Longs
reached a settlement in November of 1994 totalling $2.4 million with the
state of Hawaii. These settlements had been reserved for previously and did
not impact current quarter or year-to-date results. Longs does not expect
any future required reimbursements to the Federal regulatory agencies,
exclusive of penalties, to be material to Longs' results of operations or
financial position. If major penalties were imposed, the effect on Longs'
earnings could be material.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales increased 3% to $614 million for the quarter ended October 27, 1994, as
compared to $597 million for the similar period last year. Sales for the three
quarters were $1.9 billion as compared to $1.8 billion in the prior year. Sales
in the stores acquired from Bill's Drugs, Inc. totaled $19.5 million for the
quarter and $58.5 million for the three quarters.
Net income for the quarter was $6.4 million, or $.31 per share, as compared with
$8.9 million, or $.43 per share a year ago. Net income for the three quarters,
without the cumulative effect of last year's accounting change, was $31.5
million, or $1.52 per share, as compared with $32.8 million, or $1.59 per share
a year ago. Net income for the three quarters ended last year was increased by
$3.0 million, or $.15 per share, by the adoption of mandated rules (SFAS 109)
relating to income taxes.
Gross margins for the third quarter decreased to 25.4% as compared to 25.7% last
year due to higher merchandising costs incurred during the roll-out and
implementation phase of new systems this past quarter. Additionally, gross
margins on prescriptions have declined, reflecting current industry trends
towards lower gross margins with managed care third party plans. Operating,
administrative, and occupancy expenses were in line with expectations,
increasing from 23.1% to 23.8% as a percent of sales, due principally to wages,
occupancy, and facility charges associated with a net increase of 14 stores
since the comparable period a year ago.
The acquisition of Bill's Drugs, Inc. was completed during third quarter of the
prior fiscal year. The purchase was made with the issuance of approximately
$10.3 million in Longs common stock and the assumption of approximately $13.6
million in liabilities.
The Company repurchased 45,000 shares of its common stock from the Profit
Sharing Plan during the three quarters ended October 27, 1994, at market values
totalling $1.7 million.
At the Board of Directors meeting on November 15, 1994, the Board authorized the
Company to repurchase up to an additional two million shares of the Company's
outstanding Common Stock. This is part of the Company's continued effort to
increase shareholder value.
During the first quarter of fiscal 1994, the Company announced that an inquiry
into its Medicaid billing was being conducted by the states of Nevada and Hawaii
and Federal regulatory agencies. The Company settled for $750 thousand with the
state of Nevada and $2.4 million with the state of Hawaii. These settlements
had been reserved for previously and did not impact current quarter or
year-to-date results. The Company does not expect any future required
reimbursements, exclusive of penalties, to the Federal regulatory agencies to be
material to its results of operations or financial position. If major penalties
were imposed, the effect on the Company's earnings could be material.
Expenditures for the scanning system, new store construction, store remodels,
dividends, and stock repurchases have been, and are expected to be in the
future, funded from operations and cash reserves. To maintain desired working
capital, the Company may periodically use short-term lines of credit available
from several banks.
Six new stores were opened during the quarter and one underperforming store was
closed. A total of 313 stores were in operation at October 27, 1994. A number
of new stores, including one store to be relocated, are under construction and
additional stores are in various stages of planning.
-8-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter
ended October 27, 1994.
-9-
<PAGE>
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.
LONGS DRUG STORES CORPORATION
-----------------------------
(Registrant)
Date December 9, 1994 /s/ G. L. White
---------------- -----------------------------
G. L. White
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
/s/ C. E. Selland
-----------------------------
C. E. Selland
Treasurer
(PRINCIPAL FINANCIAL OFFICER)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-26-1995
<PERIOD-START> JAN-28-1994
<PERIOD-END> OCT-27-1994
<CASH> 47,172
<SECURITIES> 0
<RECEIVABLES> 47,042
<ALLOWANCES> 0
<INVENTORY> 299,405
<CURRENT-ASSETS> 411,864
<PP&E> 622,612
<DEPRECIATION> 220,502
<TOTAL-ASSETS> 817,744
<CURRENT-LIABILITIES> 263,037
<BONDS> 0
<COMMON> 10,327
0
0
<OTHER-SE> 497,894
<TOTAL-LIABILITY-AND-EQUITY> 817,744
<SALES> 1,863,030
<TOTAL-REVENUES> 0
<CGS> 1,378,614
<TOTAL-COSTS> 1,810,853
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 52,177
<INCOME-TAX> 20,700
<INCOME-CONTINUING> 31,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,477
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 0
</TABLE>
