<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 26, 1995
/ / 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 19,936,170 shares of common stock outstanding as of October 26, 1995.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME For the For the Three
Quarters Ended Quarters Ended
OCTOBER 26 October 27 OCTOBER 26 October 27
1995 1994 1995 1994
--------- ---------- ----------- ----------
-------------(Thousands Except Per Share)-------------
<S> <C> <C> <C> <C>
SALES $628,900 $614,461 $1,915,060 $1,863,030
COSTS AND EXPENSES:
Cost of merchandise sold 462,257 458,159 1,408,173 1,378,614
Operating and administrative 117,722 112,840 348,198 337,072
Occupancy 34,206 33,140 101,084 95,167
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 14,715 10,322 57,605 52,177
TAXES ON INCOME 5,900 3,900 23,000 20,700
--------- --------- --------- ---------
NET INCOME $ 8,815 $ 6,422 $ 34,605 $ 31,477
--------- --------- --------- ---------
--------- --------- --------- ---------
PER COMMON SHARE:
NET INCOME $.44 $.31 $1.71 $1.52
--------- --------- --------- ---------
--------- --------- --------- ---------
DIVIDENDS $.28 $.28 $ .84 $ .84
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,964 20,649 20,288 20,737
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 26 October 27 January 26
1995 1994 1995
---------- ----------- ----------
--------------(Thousands)---------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 25,552 $ 47,172 $ 57,518
Pharmacy and other receivables 46,407 47,042 53,904
Merchandise inventories 329,267 299,405 295,346
Deferred income taxes 17,422 15,879 17,165
Other 2,042 2,366 2,734
---------- ---------- ----------
Total current assets 420,690 411,864 426,667
---------- ---------- ----------
PROPERTY:
Land 78,751 80,671 76,952
Buildings and leasehold improvements 312,894 298,170 300,602
Equipment and fixtures 246,251 236,685 240,239
Beverage licenses 7,109 7,086 7,135
---------- ---------- ----------
Total property--at cost 645,005 622,612 624,928
Less accumulated depreciation 247,738 220,502 227,166
---------- ---------- ----------
Property--net 397,267 402,110 397,762
---------- ---------- ----------
OTHER NON-CURRENT ASSETS 12,008 3,770 3,532
---------- ---------- ----------
TOTAL $829,965 $817,744 $827,961
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $159,685 $163,640 $149,239
Employee compensation and benefits 59,787 55,980 56,274
Taxes payable 24,650 17,857 28,459
Current portion of guarantee 2,811 2,586 2,001
Other 23,841 22,974 21,908
---------- ---------- ----------
Total current liabilities 270,774 263,037 257,881
---------- ---------- ----------
GUARANTEE OF PROFIT SHARING PLAN DEBT 9,050 11,861 11,180
---------- ---------- ----------
DEFERRED INCOME TAXES 35,004 34,625 34,802
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock (19,936,000,
20,652,000, and 20,560,000
shares outstanding) 9,968 10,327 10,280
Additional capital 109,156 108,723 107,216
Common stock contribution to
Profit Sharing Plan -- -- 5,515
Guarantee of Profit Sharing
Plan debt (11,861) (14,447) (13,181)
Retained earnings 407,874 403,618 414,268
---------- ---------- ----------
Total stockholders' equity 515,137 508,221 524,098
---------- ---------- ----------
TOTAL $829,965 $817,744 $827,961
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
For the Three Quarters Ended
OCTOBER 26 October 27
1995 1994
-----------------------------------------
------------(Thousands)--------------
<S> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $1,921,500 $1,866,588
Payments for merchandise (1,431,648) (1,376,433)
Payments for operating,
administrative, and occupancy expenses (411,533) (405,658)
Income tax payments (26,222) (24,494)
----------- -----------
Net cash provided by operating activities 52,097 60,003
----------- -----------
INVESTING ACTIVITIES:
Payments for property additions (39,461) (30,529)
Receipts from property dispositions 1,475 765
----------- -----------
Net cash used in investing activities (37,986) (29,764)
----------- -----------
FINANCING ACTIVITIES:
Repurchase of common stock (30,949) (8,148)
Dividend payments (17,128) (17,431)
Proceeds from sale of common stock
to Profit Sharing Plan 2,000 --
----------- -----------
Net cash used in financing activities (46,077) (25,579)
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (31,966) 4,660
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 57,518 42,512
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 25,552 $ 47,172
----------- -----------
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $34,605 $31,477
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,005 28,216
Deferred income taxes 287 287
Restricted stock awards 1,093 1,372
Tax benefits credited to stockholders' equity 98 119
Effects of changes in:
Pharmacy and other receivables 7,497 3,597
Merchandise inventories (33,921) (18,881)
Other current assets 692 171
Current liabilities 11,741 13,645
----------- -----------
Net cash provided by
operating activities $52,097 $60,003
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 26, 1995 and Three Quarters Ended October 26, 1995
<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 27, 1994 20,654 $10,327 $104,518 $5,530 ($15,662) $394,894 $499,607
Net income 48,731 48,731
Dividends ($1.12 per share) (23,213) (23,213)
Profit Sharing Plan:
Issuance of stock for FY94
contribution 148 74 5,456 (5,530) 0
Stock portion of FY95
contribution 5,515 5,515
Purchase of stock from plan (105) (52) (3,517) (3,569)
Reduction of plan debt 2,481 2,481
Restricted stock awards 90 44 1,845 1,889
Tax benefits related to employee
stock plans 155 155
Repurchase of common stock (228) (114) (1,095) (6,299) (7,508)
Acquisition of Bill's Drugs, Inc.
Net of related costs 1 1 9 10
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BALANCE AT JANUARY 26, 1995 20,560 10,280 107,216 5,515 (13,181) 414,268 524,098
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 34,605 34,605
Dividends ($.84 per share) (17,128) (17,128)
Profit Sharing Plan:
Issuance of stock for
FY95 contribution 176 88 5,427 (5,515) --
Purchase of stock from plan (74) (37) (2,520) (2,557)
Sale of stock to plan 58 29 1,971 2,000
Reduction of plan debt 1,320 1,320
Restricted stock awards 31 15 1,078 1,093
Tax benefits related to employee
stock plans 98 98
Repurchase of common stock (815) (407) (4,016) (23,969) (28,392)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 26, 1995 19,936 $ 9,968 $109,156 $ -- ($11,861) $407,874 $515,137
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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 26, 1995, 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 26,
1995 and October 27, 1994 are unaudited. The Balance Sheet at January 26,
1995, and Statement of Stockholders' 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 26, 1995, $128,600,000 at
October 27, 1994, and $127,700,000 at January 26, 1995. 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 repurchased 889,000 shares of common stock at a market value
totaling $30,949,000 during the first three quarters of fiscal 1996 under
an authorization granted by the Board in November 1994. The Company sold
58,200 shares of common stock to the Profit Sharing Plan during the first
three quarters ended October 26, 1995 at market values totaling $2,000,000.
5. In March 1989, the Company sold 696,864 shares of Longs' common stock to
the Profit Sharing Plan for $25,000,000. The Plan financed this purchase
with a ten-year loan which is guaranteed by Longs Drug Stores California,
Inc. Consequently, a Guarantee of Profit Sharing Plan debt is shown on the
accompanying balance sheets with a corresponding reduction of Stockholders'
Equity.
Loan payments are made in equal quarterly installments of $930,000, which
includes interest at 8.4% per year. The loan is being repaid from
dividends on Longs' stock held by the Plan and Company contributions to the
Plan.
Members are allocated shares of Longs common stock equal in value to the
cash dividends on their allocated shares used to repay the loan. Dividends
paid to the Plan, used in part to repay principal and interest on the loan,
totaled $804,000 for the quarter ended October 26, 1995.
Allocated and unallocated shares of the leveraged stock acquisition were as
follows as of October 26, 1995:
Allocated shares 462,509
Unallocated shares 234,355
---------
Total 696,864
---------
---------
The Company has no obligation to purchase outstanding shares held by the
Plan. However, the Company has periodically repurchased shares to provide
the Plan with needed liquidity.
- 5 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Sales increased 2% to $629 million for the quarter ended October 26,
1995 as compared to $614 million for the similar period last year.
Sales for the three quarters increased 3% to $1.92 billion as compared
to $1.86 billion in the prior year. Our continued growth can be
attributed to contributions from new stores, including the six stores
recently acquired from Payless in Hawaii. Sales growth continues to
be impacted by economic conditions and intense competition in
California and Hawaii.
Growth in pharmacy sales is primarily due to new stores, an emphasis
on drug therapy as an alternative to expensive hospitalization, and an
aging population. Pharmacy sales constituted 33% of total sales in
the third quarter, up from 30% a year ago. Pharmacy sales through
third-party arrangements now approximate 75% of total pharmacy sales.
GROSS MARGINS
Gross margins for third quarter increased to 26.5% from 25.4%. Year-
to-date margins increased to 26.5% from 26.0% last year. These
increases reflect our continued efforts to reduce merchandise
acquisition costs through consolidated purchasing and several other
marketing initiatives. The Company continues to implement systems
linked directly to our vendors and warehouses to automate pharmacy and
non-pharmacy merchandise replenishment in our stores. Automated
merchandise replenishment for virtually all pharmacy products, over-
the-counter (OTC) drugs and staple stock was operating in all mainland
stores by the end of the second quarter. This has enabled the Company
to achieve greater control over merchandise costs and inventory
levels. The Company can also take advantage of its corporate buying
power in categories supported by these systems.
Category management has been introduced in several core categories
with several more categories planned for the coming year. Category
managers make fact-based decisions using internal point-of-sale (POS)
information and syndicated market data in conjunction with information
from vendors to assist in marketing our products. Category management
has allowed the Company to offer improved merchandise selection and
consistent product presentation in categories, such as OTC drugs,
cosmetics, stationery and toys.
NET INCOME
Net income for the quarter increased 37% to $8.8 million as compared
with $6.4 million a year ago. Earnings per share increased 42% to
$.44 per share compared to $.31 for the same quarter last year. Net
income for the three quarters increased 10% to $34.6 million compared
with $31.5 million last year. Earnings per share for the three
quarters increased 12% to $1.71 compared to $1.52 last year.
Improvements in net income are attributed primarily to increased gross
margins. Earnings per share increased at a rate greater than net
income due to share repurchases.
- 6 -
<PAGE>
Early this year, the Company set forth a challenge of $96 million in
earnings before LIFO and taxes for fiscal year 1996 as compared to $83
million last year. Earnings before LIFO and taxes year-to-date are
$61.2 million as compared to $54.8 million last year, an increase of
12%.
OPERATING EXPENSES
Operating, administrative and occupancy expenses for third quarter, as
a percent of sales, increased to 24.2% from 23.8% in the third quarter
last year. Year-to-date operating, administrative and occupancy
expenses rose to 23.5% from 23.2% last year. Increases were primarily
due to wages, occupancy and facilities costs associated with the six
new stores in Hawaii and other new store openings. The occupancy
expenses for the current year-to-date includes a $1.0 million
provision for stores to be closed.
INCOME TAXES
The effective tax rate of 39.9% differed from the statutory rate of
43.8% primarily due to the benefit of the federal deduction for state
income taxes and the deduction for dividends paid to the Employee
Stock Ownership Plan. The income taxes charged against earnings in
fiscal 1996 was $23.0 million compared to $20.7 million in the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash and cash equivalents decreased to $25.6 million as of October 26,
1995 from $47.2 million as of October 27, 1994. The reduction in cash
balances primarily reflects cash paid for six new stores in Hawaii
during first quarter of fiscal 1996, stock repurchases, and a slight
decrease in cash from operating activities.
CASH FROM OPERATING ACTIVITIES
Cash provided by operating activities for the three quarters decreased
to $52.1 million from $60.0 million last year. This resulted
predominantly from an increase in inventory related to new stores and
increases in operating, administrative and occupancy expenses.
INVESTING ACTIVITIES
Expenditures for property additions totaled approximately $39.5
million. This includes the addition of ten new stores this fiscal
year, other new stores under construction, and expenditures for
technology investments. Four underperforming stores were closed this
year bringing our total stores in operation to 323 by the end of the
third quarter. We plan to open five additional stores during the
remainder of the fiscal 1996. Capital expenditures have been, and are
expected to continue to be, funded from operations and cash reserves.
Planned store openings are expected to continue at the present growth
rate of 8 to 12 stores per year, excluding any potential acquisitions.
New stores, remodels, and other capital expenditures are expected to
cost approximately $40 million in fiscal 1997.
FINANCING ACTIVITIES
In an effort to increase shareholder value, the Company continues to
repurchase stock under an authorization granted by the Board in
November 1994. During the first three quarters of fiscal 1996, the
Company repurchased 889,000 shares of common stock with a value
totaling $30.9 million. In addition, 58,000 shares of common stock
were sold to the Profit Sharing Plan during the second quarter at
market values totaling $2.0 million.
- 7 -
<PAGE>
To maintain desired working capital, the Company may utilize short-
term lines-of-credit available from several banks. During fiscal
1996, all investing and financing activities have been funded from
operations and cash reserves. Available lines-of-credit were not
utilized.
INTEGRATED HEALTH CONCEPTS (IHC)
During the second quarter Longs announced the formation of a new
subsidiary, IHC, a wholly-owned subsidiary of Longs Drug Stores
California, Inc., to enhance Longs' position in the growing managed
health care market. IHC is a pharmacy benefit management company
which will enable Longs to develop and market pharmacy insurance
programs to employers and managed care organizations who need
prescription services for their employees and members. IHC began
marketing their pharmacy programs this fall to potential clients in
all areas where our stores are located.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiary, Longs Drug Stores California, Inc.
("Subsidiary"), has been named as one of a large number of
defendants in two lawsuits filed in United States District Court
for the Southern District of Florida, Harley S. Tropin, as Receiver
of Lone Star Trading Company and its subsidiaries and affiliates, as
Trustee of Premium Sales Corporation, Plaza Trading Corporation and
as the designated corporate representative of Windsor Wholesale
Corporation v. Kenneth Thenen, et al. ("Tropin"), and Walco
Investments, Inc., et al. v. Kenneth Thenen, et al. ("Walco"). In
addition, Subsidiary has been named in three cross-claims by certain
co-defendants in Walco. The cases allege that investors invested in
funding partnerships that sold securities offering a high rate of
return from the partnerships' investment in the purported
"diverting" business of Premium Sales Corporation and its affiliates
("Premium"), which was in fact a pyramid scheme based on falsified
transactions. They further allege that a former employee of
Subsidiary confirmed to the funding partnerships, on behalf of
Subsidiary, nonexistent transactions; and they claim that Subsidiary
is secondarily liable for the acts of the former employee. Several
other retailers are co-defendants in the actions. Both cases are
attempts to recover damages on behalf of essentially the same group
of investors, but Walco is a class action by investors in the
funding partnerships, and Tropin is an action brought by Premium's
receiver and trustee in bankruptcy. Plaintiffs in both actions seek
unspecified damages, alleging investor and other losses of hundreds
of millions of dollars.
The lawsuits were first filed in January 1994. Subsidiary was
dropped from Walco without prejudice in May, 1994 and was added back
into the case in November 1995. Discovery, which is consolidated
for the cases and is in progress, has not yet been completed.
Subsidiary denies having any knowledge of the alleged wrongdoing by
its former employee or any other person in connection with these
matters and believes that it has a number of defenses to the claims
made against it. Subsidiary intends to vigorously defend itself.
At this time the Company and Subsidiary are unable to predict the
outcome of these actions.
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 26, 1995.
- 8 -
<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 11, 1995 /s/ G. L. White
---------------------- ---------------------------------------
G. L. White
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
/s/ C. E. Selland
---------------------------------------
C. E. Selland
Treasurer
(PRINCIPAL FINANCIAL OFFICER)
- 9 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-25-1996
<PERIOD-START> JAN-27-1995
<PERIOD-END> OCT-26-1995
<CASH> 25,552
<SECURITIES> 0
<RECEIVABLES> 46,407
<ALLOWANCES> 0
<INVENTORY> 329,267
<CURRENT-ASSETS> 420,690
<PP&E> 645,005
<DEPRECIATION> 247,738
<TOTAL-ASSETS> 829,965
<CURRENT-LIABILITIES> 270,774
<BONDS> 0
<COMMON> 9,968
0
0
<OTHER-SE> 505,169
<TOTAL-LIABILITY-AND-EQUITY> 829,965
<SALES> 1,915,060
<TOTAL-REVENUES> 0
<CGS> 1,408,173
<TOTAL-COSTS> 1,857,455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 57,605
<INCOME-TAX> 23,000
<INCOME-CONTINUING> 34,605
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,605
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 0
</TABLE>
