<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 July 27, 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 20,013,985 shares of common stock outstanding as of July 27, 1995.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME For the For the Two
Quarters Ended Quarters Ended
JULY 27 July 28 JULY 27 July 28
1995 1994 1995 1994
_________ _________ _________ _________
---------------(Thousands Except Per Share)---------------
<S> <C> <C> <C> <C>
SALES $646,359 $626,310 $1,286,160 $1,248,569
COSTS AND EXPENSES:
Cost of merchandise sold 475,347 463,186 945,916 920,455
Operating and administrative 115,888 111,049 230,476 224,232
Occupancy 34,338 31,941 66,878 62,027
-------- -------- -------- --------
INCOME BEFORE TAXES ON INCOME 20,786 20,134 42,890 41,855
TAXES ON INCOME 8,300 8,100 17,100 16,800
-------- -------- -------- --------
NET INCOME $ 12,486 $ 12,034 $ 25,790 $ 25,055
-------- -------- -------- --------
-------- -------- -------- --------
PER COMMON SHARE:
NET INCOME $.62 $.58 $1.26 $1.21
-------- -------- -------- --------
-------- -------- -------- --------
DIVIDENDS $.28 $.28 $.56 $.56
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 20,274 20,780 20,450 20,781
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-1-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
July 27 July 28 January 26
1995 1994 1995
------------- ------------ ------------
----------------(Thousands)---------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 39,376 $ 50,104 $ 57,518
Pharmacy and other receivables 45,607 42,413 53,904
Merchandise inventories 296,878 276,322 295,346
Deferred income taxes 17,059 15,266 17,165
Other 1,093 1,772 2,734
-------- -------- --------
Total current assets 400,013 385,877 426,667
-------- -------- --------
PROPERTY:
Land 78,006 77,516 76,952
Buildings and leasehold improvements 307,445 292,716 300,602
Equipment and fixtures 246,384 233,294 240,239
Beverage licenses 7,145 7,047 7,135
-------- -------- --------
Total property--at cost 638,980 610,573 624,928
Less accumulated depreciation 243,362 212,766 227,166
-------- -------- --------
Property--net 395,618 397,807 397,762
-------- -------- --------
OTHER NON-CURRENT ASSETS 12,318 3,617 3,532
-------- -------- --------
TOTAL $807,949 $787,301 $827,961
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $145,182 $140,149 $149,239
Employee compensation and benefits 56,055 52,936 56,274
Taxes payable 22,813 14,243 28,459
Current portion of guarantee 2,753 2,533 2,001
Other 22,538 23,031 21,908
-------- -------- --------
Total current liabilities 249,341 232,892 257,881
-------- -------- --------
GUARANTEE OF PROFIT SHARING PLAN DEBT 9,775 12,528 11,180
-------- -------- --------
DEFERRED INCOME TAXES 34,647 35,010 34,802
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock (20,014,000, 20,653,000,
and 20,560,000 shares outstanding) 10,007 10,327 10,280
Additional capital 110,596 108,668 107,216
Common stock contribution to Profit Sharing Plan -- -- 5,515
Guarantee of Profit Sharing Plan debt (12,528) (15,061) (13,181)
Retained earnings 406,111 402,937 414,268
-------- -------- --------
Total stockholders' equity 514,186 506,871 524,098
-------- -------- --------
TOTAL $807,949 $787,301 $827,961
-------- -------- --------
-------- -------- --------
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-2-
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
For the Two Quarters Ended
July 27 July 28
1995 1994
__________________________
--------(Thousands)-------
OPERATING ACTIVITIES:
<S> <C> <C>
Receipts from customers $1,293,221 $1,256,319
Payments for merchandise (951,506) (918,682)
Payments for operating, administrative, and occupancy expenses (276,782) (277,010)
Income tax payments (19,385) (17,878)
---------- ----------
Net cash provided by operating activities 45,548 42,749
---------- ----------
INVESTING ACTIVITIES:
Payments for property additions (27,098) (16,546)
Receipts from property dispositions 560 739
---------- ----------
Net cash used in investing activities (26,538) (15,807)
---------- ----------
FINANCING ACTIVITIES:
Repurchase of common stock (27,628) (7,698)
Dividend payments (11,524) (11,652)
Proceeds from sale of common stock to Profit Sharing Plan 2,000 --
---------- ----------
Net cash used in financing activities (37,152) (19,350)
---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (18,142) 7,592
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 57,518 42,512
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 39,376 $ 50,104
---------- ----------
---------- ----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $25,790 $25,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,897 18,718
Deferred income taxes 293 (860)
Restricted stock awards 731 864
Tax benefits credited to stockholders' equity 66 81
Effects of changes in:
Pharmacy and other receivables 8,297 8,226
Merchandise inventories (1,532) 4,202
Other current assets 1,641 765
Current liabilities (9,635) (14,302)
---------- ----------
Net cash provided by operating activities $45,548 $42,749
---------- ----------
---------- ----------
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 26, 1995 and Two Quarters Ended July 27, 1995
<TABLE>
<CAPTION>
PROFIT GUARANTEE
SHARING OF PROFIT TOTAL
COMMON STOCK 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 ($1.12 per share) (23,213) (23,213)
Profit Sharing Plan:
Issuance of stock for FY94 contribution 148 74 5,456 (5,530) 0
Stock portion of FY95 contribution 5,515 5,515
Purchase of stock from plan (105) (52) (3,517) (3,569)
Reduction of plan debt 2,481 2,481
Restricted stock awards 90 44 1,845 1,889
Tax benefits related to employee
stock plans 155 155
Repurchase of common stock (228) (114) (1,095) (6,299) (7,508)
Acquisition of Bill's Drugs, Inc.
Net of related costs 1 1 9 10
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 26, 1995 20,560 10,280 107,216 5,515 (13,181) 414,268 524,098
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Net income 25,790 25,790
Dividends ($.56 per share) (11,524) (11,524)
Profit Sharing Plan:
Issuance of stock for FY95 contribution 176 88 5,427 (5,515) 0
Purchase of stock from plan (29) (15) (925) (940)
Sale of stock to plan 58 29 1,971 2,000
Reduction of plan debt 653 653
Restricted stock awards 19 10 721 731
Tax benefits related to employee
stock plans 66 66
Repurchase of common stock (770) (385) (3,814) (22,489) (26,688)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 27, 1995 20,014 $10,007 $110,596 $ 0 ($12,528) $406,111 $514,186
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<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 July 27, 1995
and July 28, 1994 are unaudited. The Balance Sheet at January 26, 1995,
and Statement of Stockholders' Equity for the year then ended, presented
herein, has 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 $126,600,000 at July 27, 1995, $128,000,000 at July 28,
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 799,000 shares of common stock at a market value
totaling $27,628,000 during the first two quarters of fiscal 1996 under an
authorization granted by the Board in November 1994. The Company sold
58,000 shares of common stock to the Profit Sharing Plan during second
quarter 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 $1,611,000 for the quarter ended July 27, 1995.
Allocated and unallocated shares of the leveraged stock acquisition were as
follows as of July 27, 1995:
<TABLE>
<S> <C>
Allocated shares 444,839
Unallocated shares 252,025
_________
Total 696,864
_________
_________
</TABLE>
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.
6. In April 1995, the Board of Directors approved the Longs Drug Stores
Corporation Deferred Compensation Plan of 1995. The Plan provides eligible
employees with the opportunity to defer a specified percentage of their
cash compensation earned subsequent to July 27, 1995. Resulting
obligations will be payable on a date selected by the employee participant
in accordance with the terms of the Plan. The total Deferred Compensation
Obligations under the Plan may not exceed $10,000,000.
-5-
<PAGE>
7. At the August 15, 1995 Board of Directors meeting, the Board announced the
election of Donald L. Sorbey, Ph.D., and Gerald H. Saito to the Board,
increasing the Board to 13 members. Donald L. Sorbey, Ph.D., is Emeritus
Professor of Pharmacy and Dean Emeritus of the School of Pharmacy at
University of the Pacific in Stockton, California. Gerald H. Saito has
served as Vice President and District Manager since 1992 and has been with
Longs over 25 years, having worked through the ranks to store manager in
1978. Gerald has led Longs' Hawaii operations as District Manager since
1991.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
-----
Sales increased 3% to $646 million for the quarter ended July 27, 1995 as
compared to $626 million for the similar period last year. Sales for the two
quarters increased 3% to $1.3 billion as compared to $1.2 billion in the
prior year. Our continued growth can be attributed to contributions from new
stores including our six stores, acquired recently in Hawaii. Sales growth
continues to be impacted by depressed economies in California and Hawaii
fueled by intense competition, base closures, and other defense cut-backs.
NET INCOME
----------
Net income for the quarter increased 4% to $12.5 million as compared with $12.0
million a year ago. Earnings per share increased 6% to $.62 per share compared
to $.58 for the same quarter last year. Net income for the two quarters
increased 3% to $25.8 million compared with $25.1 million last year. Earnings
per share for the two quarters increased 5% to $1.26 per share compared to
$1.21 last year. Improvements in net income are attributed primarily to
increased gross margins on sales due to lower costs for acquisition of
merchandise and less promotional activity. Earnings per share increased at a
rate greater than net income due to shares repurchased.
GROSS MARGINS
-------------
Gross margins for second quarter increased to 26.5% from 26.0%. Year-to-date
margins increased to 26.5% from 26.3% last year. These increases reflect our
continued efforts to reduce merchandise acquisition costs through consolidated
purchasing and a slight decrease in the LIFO provision.
The Company is implementing new systems to automate pharmacy and non-pharmacy
merchandise replenishment in our stores linked directly to our vendors and
warehouses. Automated merchandise replenishment for virtually all pharmacy
products, over-the-counter (OTC) drugs and staple stock was operating in all
mainland stores by quarter end. 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. We expect to realize additional benefits from these
replenishment processes during the remainder of the year.
-7-
<PAGE>
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.
The Company uses the LIFO method of inventory valuation. The LIFO
provision included in cost of merchandise sold for the two quarters of
fiscal 1996 was $1.6 million compared to $2.0 million last year. The
reduction is a result of improved buying practices and continued low
inflation rates.
OPERATING EXPENSES
------------------
Operating, administrative and occupancy expenses for second quarter were in
line with expectations as a percent of sales, increasing to 23.2% from 22.8%
in the second quarter last year. Year-to-date operating, administrative and
occupancy expenses rose slightly to 23.1% from 22.9% 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. Included in second
quarter occupancy costs is a $1.0 million provision for costs to close
underperforming stores.
INCOME TAXES
------------
The effective tax rate of 39.9% differed from the statutory rate of 43.6%
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 $17.1 million
versus $16.8 million in the prior year.
PHARMACY
--------
Pharmacy sales constituted 33% of total sales year-to-date, up from 31% last
year. Sales increases were due to an emphasis on drug therapy as an
alternative to expensive hospitalization and an aging population. Pharmacy
gross margins declined slightly as more individuals convert to third-party
health care plans and as reimbursement on third-party contracts continue to
decrease. These sales were 74% of total pharmacy sales year-to-date, up from
68% last year. To help maintain pharmacy profit margins we have implemented
programs to increase the number of prescription drugs filled with a generic
equivalent and continue efforts to lower acquisition costs.
CASH POSITION
-------------
Cash and cash equivalents decreased to $39.4 million as of July 27, 1995 from
$50.1 million as of July 28, 1994. The reduction in cash balances primarily
reflects cash paid for six new stores in Hawaii during first quarter of
fiscal 1996 and stock repurchases.
-8-
<PAGE>
CASH FROM OPERATING ACTIVITIES
------------------------------
Cash provided by operating activities for the two quarters increased to $45.5
million from $42.7 million last year. This resulted from improvement in
merchandise acquisitions costs.
INVESTING ACTIVITIES
--------------------
Expenditures for property additions totaling approximately $27 million
include the addition of nine new stores, including six stores in Hawaii
acquired from PayLess, other new stores under construction, and expenditures
for information system equipment. Two underperforming stores were closed this
year bringing our total stores in operation to 324 by the end of the second
quarter. We plan to open six additional new stores and close three existing
stores during the remainder of fiscal 1996. One of our planned store closures
is in Anchorage, Alaska. The closing of this store withdraws Longs from a
market we have been in since 1977. Consistent with previous years, 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. Nine new
stores, remodels, and other capital expenditures are expected to cost
approximately $34 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. The Company repurchased 799 thousand shares of common stock at market
values totaling $27.6 million during the first two quarters of fiscal 1996.
In addition, 58 thousand shares of common stock were sold to the Profit
Sharing Plan during second quarter at market values totaling $2.0 million.
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 will begin marketing their pharmacy programs this fall to potential
clients in all areas where our stores are located.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On May 16, 1995, the Annual Meeting of Shareholders of the Company was
held in Walnut Creek, California.
(b) The following directors were elected:
<TABLE>
<CAPTION>
Votes in Favor Votes Withheld
-------------- --------------
<S> <C> <C>
R.M. Long 18,677,430 154,497
R.A. Plomgren 18,664,768 167,159
F.E. Trotter 18,633,851 198,076
H.R. Somerset 18,632,610 199,317
</TABLE>
There were no abstentions and no broker non-votes.
(c) Other directors whose term of office as a director continued after the
Annual Meeting:
R.M. Brooks M.S. Metz, Ph.D.
W.G. Combs S.D. Roath
D.G. DeSchane T.R. Sweeney
E.E. Johnston
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
July 27, 1995.
-10-
<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 September 8, 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)
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1996
<PERIOD-START> JAN-27-1995
<PERIOD-END> JUL-27-1995
<CASH> 39,376
<SECURITIES> 0
<RECEIVABLES> 45,607
<ALLOWANCES> 0
<INVENTORY> 296,878
<CURRENT-ASSETS> 400,013
<PP&E> 638,980
<DEPRECIATION> 243,362
<TOTAL-ASSETS> 807,949
<CURRENT-LIABILITIES> 249,341
<BONDS> 0
<COMMON> 10,007
0
0
<OTHER-SE> 504,179
<TOTAL-LIABILITY-AND-EQUITY> 807,949
<SALES> 1,286,160
<TOTAL-REVENUES> 0
<CGS> 945,916
<TOTAL-COSTS> 1,243,270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,890
<INCOME-TAX> 17,100
<INCOME-CONTINUING> 25,790
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,790
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 0
</TABLE>
