<PAGE>
LONGS DRUGS 1996 ANNUAL REPORT
[PHOTO]
Picture of a group of store managers at a volleyball match
THE YEAR OF TEAM ACCOMPLISHMENTS
LONGS DRUGS
<PAGE>
COMPANY PROFILE
FINANCIAL HIGHLIGHTS
(MILLIONS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
SALES $2,644 $2,558
- --------------------------------------------------------------------------------
NET INCOME(*) 46 49
- --------------------------------------------------------------------------------
EARNINGS PER SHARE(*) 2.29 2.35
- --------------------------------------------------------------------------------
TOTAL ASSETS 854 828
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 523 524
- --------------------------------------------------------------------------------
RETURN ON AVERAGE STOCKHOLDERS' EQUITY 8.8% 9.5%
- --------------------------------------------------------------------------------
NUMBER OF STORES AT YEAR END 328 317
- --------------------------------------------------------------------------------
SALES SQUARE FOOTAGE AT YEAR END 5.2 5.1
- --------------------------------------------------------------------------------
</TABLE>
(*) FISCAL 1996 INCLUDES A ONE-TIME $14 MILLION CHANRGE FOR THE SETTLEMENT OF A
LAWSUIT, REDUCING AFTER-TAX NET INCOME BY $8.4 MILLION, OR $.42 PER SHARE.
A COMMITMENT TO THE TEAM
TEAM, INNOVATION, AND HEIGHTENED PERFORMANCE ACCURATELY DESCRIBE LONGS STORES
AND THE SPIRIT OF LONGS PEOPLE. LONGS POWERFUL GROUP OF EMPLOYEES DELIVERED A
TURNAROUND YEAR FOR THE COMPANY AND SOLIDIFIED LONGS PRESENCE IN VIRTUALLY EVERY
MAJOR MARKET WE SERVE IN CALIFORNIA, HAWAII, NEVADA AND COLORADO. AS ONE OF THE
LARGEST DRUGSTORE CHAINS IN NORTH AMERICA, LONGS IS AMONG THE BEST IN RETAILING.
SERVICE, VALUE, CREATIVE THOUGHT AND A COMPETITIVE SPIRIT ARE HALLMARKS OF OUR
OPERATION.
SALES
(Billions)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
-------------------------------------
<S> <C> <C> <C> <C>
$2.37 $2.48 $2.50 $2.56 $2.64
</TABLE>
[GRAPH]
Financial graph depicting sales growth for five years
(-- Cover-
This group of store managers celebrating victory after a competitive match is
representative of the spirit and success enjoyed this past year by our entire
team of Longs employees. It was a year of significant team accomplishments.
2
<PAGE>
MESSAGE TO SHAREHOLDERS
"WE EXPRESS PRIDE IN THE TEAM WE HAVE ASSEMBLED, AND WE ARE PROUD OF OUR YEAR OF
ACCOMPLISHMENTS"
TEAM
[PHOTO]
Picture of Bob Long and Steve Roath
(left) Bob Long - Chairman of the Board and Chief Executive Officer
(right) Steve Roath, President
Highlighted by healthy sales gains, improved margins and strong earnings,
fiscal 1996 was a successful turnaround year for Longs. These achievements
reflect the teamwork of our 16,000 employees who have successfully implemented
the strategic initiatives we've pursued over the past two years -- from
strengthening our core pharmacy business and redefining the role of our
marketing department to reducing our merchandise acquisition cost and increasing
our use of technology to improve service and productivity. As a result of these
initiatives, Longs is a much stronger company today with a solid foundation of
outstanding employees, well-located stores and a popular, well-differentiated
merchandising strategy on which to build.
STRONG FINANCIAL RESULTS
This letter briefly reviews our financial results for the fiscal year ended
January 25, 1996. We began the year by setting an ambitious objective of
reaching $96 million in pre-tax, pre-LIFO earnings. We ended the year having
attained this goal. While reported net income for the year was down slightly to
$46.2 million, or $2.29 per share, our results include a one-time pre-tax $14.0
million charge for settlement of a lawsuit, as described in the Notes to
Consolidated Financial Statements. Without this charge, our net earnings would
have increased to $54.6 million in fiscal 1996, a 12.1% gain. Our improved
profitability reflects greater productivity throughout Longs, a lower cost of
merchandise and continued cost containment.
3
<PAGE>
MESSAGE TO SHAREHOLDERS
WORKING TOGETHER
[PHOTO]
A Pharmacist talking with a patient in a consultation area
Pharmacy consultation- --)
We configure our new pharmacies to bring the parmacist closer to the patient.
Our consultation areas provide an appropriate space for Longs pharmacists to
review dispensed medication with their patients.
Sales also showed solid gains in fiscal 1996, with total sales up 3.4%,
reflecting the fifteen new stores we acquired or opened, the closing of four
stores, and a modest 0.7% increase in same store sales. We are especially
encouraged by the nearly 10.7% growth in pharmacy sales.
ENHANCED MARKETING SUPPORT
At the heart of our marketing and merchandising philosophy is our
commitment to exceeding customers' expectations for service, selection,
convenience and value every time they visit a Longs Drug Store. This commitment
has guided Longs since our founding 58 years ago and remains a cornerstone of
our business today. We are refining our marketing strategy as part of our
redefinition of the marketing function and our managers are doing an excellent
job of adapting and implementing our new tactics at the store level.
In the past twelve months, we have established chainwide pricing
strategies, enhanced our advertising presence and begun implementing category
management -- an important change whereby our corporate marketing experts assist
the stores in managing the purchase and merchandising of core categories of the
products we sell. The result is smarter, more cost-effective buying, better
merchandising and increased store-level productivity. Based on the success of
category management thus far, we have accelerated its implementation and by the
end of the year it will encompass more than half of the general merchandise in
our stores. Currently 22 plan-o-grams are in place in our stores with close to
60 anticipated within the year. Plan-o-grams are fact based merchandise models.
Convenience foods has recently joined pharmacy, photo, and cosmetics as a
core category. A consistently organized presentation of food, beyond our normal
promotional mix, will strengthen customers' views of Longs as a convenient
destination for staple foods including dairy, bakery and frozen foods.
A SUPERIOR PHARMACY
Pharmacy continues to be our core business, representing 32% of fiscal 1996
sales. With the objective of enhancing this critical part of our operation --
particularly in light of the external
4
<PAGE>
MOVING FORWARD
pressures on profit margins and increasing customer demand for service -- we are
creating a new, better Longs pharmacy for the 1990s and beyond. In the rapidly
changing world of health care, we will continue to strike a balance between
optimum efficiency and higher levels of patient service, a balance necessary for
the growth of our pharmacy business.
While our service levels are among the highest in drug retailing, we are
taking steps to raise them even higher. By making our pharmacists more
accessible to patients, shortening wait times and reducing the average cost of
filling prescriptions, we are developing a superior pharmacy for our customers.
We are also evaluating ideas to improve the work flow and physical design of our
pharmacies as well as new and expanded use of technology.
One way that we are positioning the Longs pharmacy as a valuable link in the
health care delivery system is with Integrated Health Concepts (IHC), a wholly-
owned subsidiary. IHC will market pharmacy services to employer groups such as
school districts and hospitals, and it will develop and market services to HMOs
and other healthcare large providers.
For Longs, this pharmacy benefit management company should provide
opportunities to offset shrinking third party margins. IHC allows us to be the
manager rather than the managed.
Technology is playing an important role in strengthening our pharmacy
operations. For example, 90% of our pharmaceuticals are now re-ordered based
upon sales activity using our new Pharmacy Replenishment Order system.
TRIP ASSURANCE
"TRIP ASSURANCE LIES AT THE HEART OF OUR MARKETING AND MERCHANDISING
PHILOSOPHY."
Convenience drives and motivates today's customer. Customers view shopping as
a chore not a recreational activity as in years past. Customers in the '90s
seek out those stores that consistently exceed their expectations.
Today's customer selects a drug retailer that they trust to carry the kind of
merchandise they would expect to find in a drug store. They want the
merchandise to be fresh, in stock, and easy to find.
Customers expect items sold in a service department like pharmacy or cosmetics
to be dispensed by knowledgeable and helpful people. Today's customer wants to
get in and out of the store quickly and to make solid, intelligent buying
decisions.
Exceeding all of these expectations identifies a retailer that is trusted,
consistent and one which rarely disappoints. That is why Trip Assurance lies at
the heart of our marketing and merchandising philosophy.
[PHOTO]
A customer at a check-out stand buying merchandise
(-- Customer Service Audits
Upgrading our customer service is a critical aspect of our PASSPORT TO THE
FUTURE program. "Mystery Shoppers" audit the overall service offering in all of
our stores as part of an ongoing measurement of how well we deliver on our
service standards.
5
<PAGE>
We are also evaluating a new pharmacy computer system that will further improve
our efficiency and responsiveness. By enabling our well trained professionals
to spend more time with their customers patients, this new system will also help
shift the emphasis in our pharmacies from one of order fulfillment to health
maintenance.
TECHNOLOGY -- A STRATEGIC ASSET
We are applying the productivity and service-enhancing power of technology not
only in our pharmacies, but throughout our Company as well. Our goal in the use
of information systems -- which have already contributed to our improving
margins -- is to enhance profitability while maintaining the high levels of
service for which Longs is known.
[PHOTO]
Customers selecting merchandise from our newly expanded staple food section
(-- Convenience Food Section
This year, many of our stores are expanding their food sections to provide
greater convenience for our customers.
This past year we realized some of the benefits of our new point-of-sale
system, which has enabled us to measure more accurately what is happening in our
stores. Our store managers now have ready access to a great deal of highly
useful information about their stores -- from sales tracking to excess inventory
reports -- and a greater ability to evaluate the impact of their decisions. Our
new and evolving information systems, combined with the traditional strengths of
our store managers, are creating a powerful synergy.
On the corporate level, we are equipping our
[PHOTO]
Customers selecting merchandise found in our "Bargain Alley"
(-- Bargain Alley
Customers know that we merchandise many of our ad items in this central
location called "Bargain Alley" and that many non-advertised values
can be found here. In short, they think Bargain Alley is fun.
6
<PAGE>
[PHOTO]
Picture of Terry Burnside and Cynthia Henry.
Vice President of Merchandising, Terry Burnside and Cosmetics Category
Manager, Cynthia Henry discuss upcoming changes to a section of merchandise
she manages.
management team with computerized information systems to assist them in the
planning process. Going forward, managers will have the ability to generate
detailed plans and ask "what if" questions that will help in evaluating growth
plans and changes. We're also using technology to train our store employees.
Most of our people benefit from expanded use of L.I.T.E. (Longs Interactive
Training Environment), our in-house computer-based training. Employees can
study at their own pace using interactive techniques that teach a wide variety
of skills needed to be successful merchants.
After a very successful test, we will roll out a debit card system during the
coming year. We are also investigating ways to reach new customers with
emerging technologies. Our goal is to be better than the best among our
industry peers in the use of technology.
[PHOTO]
Customer paying for merchandise using the newly installed debit card system.
(-- Debit Card - Late last year we tested our debit card systems that permit
our customers to use their ATM cards instead of checks. Chain-wide rollout
of this system is underway.
SUSTAINED, LONG-TERM GROWTH
Building on our recent momentum, we expect fiscal 1997 to be another
successful year for Longs. We will continue to work in the coming year toward
our goal of sustained, profitable growth.
We believe that our recent initiatives and investments in marketing,
infrastructure and systems will help us realize our long-range
objectives. Our systems enhancements throughout the Company are well under way
and our overall marketing strategy is now in place. We are improving our
already strong pharmacy operations and have strengthened cost controls in all
departments Company wide.
We are intensifying our already strong commitment to Longs' most important
priority, our customers. Providing high levels of customer
[LOGO]
Picture of the Longs logo -- mortar and pestle
REINVENTING THE PHARMACY
Last summer Longs began to investigate new and unique ways to deliver our
pharmacy services. Our objective is to gain operational benefits that address
improved customer service, revenue enhancement and reduced operating costs.
We looked at the pharmacy within the context of today's high prescription
volumes. This re-design activity views the pharmacy as a neighborhood health
center that concentrates on wellness and an ongoing interaction between Longs
customers and our pharmacy professionals.
Our "New Concept Pharmacy" is taking shape. We are testing a number of ideas
that look at new physical designs, improved work flow, technological
enhancements, and additional training of our pharmacy staff. Several stores are
participating in our evaluation, and the solutions provided by our employees and
our customers will allow us to continue to succeed in this critical core
department.
Our goal: "TO BE BETTER THAN THE BEST."
7
<PAGE>
ACCENT ON EXCELLENCE
service has always been a hallmark of Longs, and through PASSPORT TO THE FUTURE
- -- which measures employee performance by gauging accuracy, store cleanliness,
courtesy and other key elements of direct interaction with our customers -- we
are building on that tradition. PASSPORT is designed to ensure that we deliver
on the values expressed in the Longs Mission Statement in each of our stores
every day. We believe this focus will continue to be an important contributor
to our Company's success.
Our plans for fiscal 1997 are to open 12 to 15 new stores and we currently
have over 25 locations in various stages of planning. Some of these new stores
will be Longs Pharmacies that are smaller than our traditional stores. We
anticipate these smaller stores will generally become profitable sooner than a
full size Longs, although the net dollars they contribute will also be less.
More importantly, Longs pharmacies demonstrate our flexibilty to meet the needs
of each individual market.
We are also working to improve same store sales by sharpening our store-level
execution, creating a more exciting shopping environment and actively
communicating our customer offering -- Longs will have the right product, in the
right place, at the right price with the right level of knowledge and service.
OUR PEOPLE ARE THE KEY
Clearly, the most important ingredient in our sustained, long-term growth is
the people of Longs. It is their team spirit and ability to execute effectively
that is the chief means of differentiating Longs from our competition. We
constantly receive comments from those outside our Company about the strength
[PHOTO]
Longs employee learning how to use a photo finishing lab at our own training
center
(-- In Store Lab Training
We train operators of Longs in store photo finishing labs at our own training
center in 20% less time than outside sources require. Longs trainers provide
quality training that incorporates our service values into the job skills
being taught.
8
<PAGE>
THE TEAM FOCUS
of our people and their unique sense of Company ownership. While our employees
own more than 22% of the Longs stock, their pride and sense of ownership goes
much further. Our large number of veteran employees and the sense of family
that they bring to our Company speaks of a palpable strength that is hard to
quantify. We'd like to recognize one such veteran. This past year our Vice
President of Administration Bill Combs retired after more than 50 years of
service to Longs. We wish him well.
In closing, we thank all of our employees for their hard work and loyalty and
look forward to reporting on our Company's continuing progress.
/s/Steve Roath /s/Bob Long
S.D. Roath R.M. Long
PRESIDENT CHIEF EXECUTIVE OFFICER
WALNUT CREEK, CALIFORNIA
APRIL 3, 1996
[LOGO]
Picture of the "Passport to the Future"
logo -- a globe with a plane flying by
PASSPORT TO
THE FUTURE
PASSPORT TO THE FUTURE is a continuous improvement program for all Longs
people. PASSPORT measures performance, and the program recognizes and rewards
people as they grow and improve.
PASSPORT began as we outlined our corporate financial goals. PASSPORT TO THE
FUTURE'S primary objective mobilizes and focuses all Longs people on our company
goal and it identifies each employee's contribution toward that goal.
We chose the PASSPORT metaphor because continuous growth represents an ongoing
journey. We identified critical "destinations" along the way that are essential
in the achievement of our goal.
PASSPORT "destinations" measure:
(-- The accuracy of our work
(-- The warmth and completeness of our service to the customer
(-- The quality of our shopping environment
(-- The partnership between Longs and our vendors and communities
(-- Traditional quantifiable measurements such as sales and net income.
This annual program creates a win-win situation. Our employees earn
recognition and tangible rewards while learning to do their jobs better. The
Company wins through higher levels of employee performance and most importantly,
our customers win with a shopping experience that exceeds their expectations.
[PHOTO]
An employee helps a customer at the cosmetics counter
(-- Cosmetics Service
Cosmetics, pharmacy and photo form our service triad where we provide
personalized attention to our customers. Knowledgeable, well-trained people
are pivotal to the success of these departments, and our cosmetics personnel
eclipse most in our industry.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales for fiscal 1996 increased 3.4% over 1995, which increased 2.4% over
1994. Our continued sales growth can be attributed to both existing and new
stores, including the six stores in Hawaii acquired in the beginning of the
year. Same store sales increased 0.7% in 1996, and decreased 1.5% in 1995. The
fiscal year 1996 improvement reflects the success of marketing initiatives we
have implemented over the last two years.
Pharmacy sales represents 32.0% of total sales for the fiscal year compared to
30.1% in 1995 and 28.7% in 1994. Sales to third party health care plans
represents 76.5% of pharmacy sales as compared to 71.3% and 64.6% for 1995 and
1994. It is expected that third party sales will continue to increase as the
former cash customers move to managed care services.
Longs' historically high percentage of promotional sales is a key part of our
sales growth, and control over promotional gross margins has contributed to an
increase in gross margin dollars.
Gross margins for fiscal 1996 increased to 26.4% from 26.0% in 1995 and 25.5%
in 1994. The improvement in gross margins is primarily due to category
management, market group pricing, and other marketing initiatives.
Category management has been introduced in a number of core categories with
several more categories planned for the coming year. Category managers make
decisions using internal information and syndicated market data in conjunction
with information from vendors to assist in marketing our products. This has
allowed the Company to offer improved merchandise selection and consistent
product presentation. Category management complements the unique offerings that
individual stores tailor to their local markets.
Market group pricing has provided the tools to improve our competitive pricing
position and has benefited both sales and gross margins. Pricing decisions are
based on timely market research and are supported centrally and provided to
stores on a regular basis.
Other marketing initiatives include partnering relationships with several
vendors that provide attractive marketing opportunities and reduced acquisition
costs. Systems linked directly to our vendors and warehouses automate a growing
share of pharmacy and non-pharmacy merchandise replenishment in our stores.
Operating and administrative expenses (excluding the legal settlement) as a
percent of sales were 17.8% in fiscal 1996 as compared to 17.9% in 1995 and
17.6% in 1994. This improvement was primarily the result of closely monitoring
labor and benefit costs in relation to changes in sales.
Improved control over expenses has been achieved through close attention to
individual stores' sales, margins, and labor costs on a weekly basis. This
allows stores to be aware of, and quickly adapt to changing conditions in their
local markets. Store performance is linked to goals set forth in advance in
cooperation with store, district, and senior management.
Occupancy costs for fiscal 1996 were 5.2% of sales compared with 4.9% in 1995
and 4.6% in 1994. This increase reflects costs associated with new store
openings, including the six new stores in Hawaii.
Net income was $46.2 million or $2.29 per share for the fiscal year ended
January 25, 1996. Without a one-time pre-tax charge of $14.0 million for the
settlement of the lawsuit, fiscal 1996 earnings would have been $54.6 million,
up 12.1% from a year ago. This compares with earnings of $48.7 million or $2.35
per share in fiscal 1995 and $52.8 million or $2.56 per share in fiscal 1994.
The after tax impact of settling the lawsuit was $8.4 million which reduced
reported earnings for the fiscal year by $0.42 per share. The legal settlement
is described in the Notes to the Consolidated Financial Statements.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL DATA
(THOUSANDS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $2,644,376 $2,558,269 $2,499,224 $2,475,475 $2,365,916
- ----------------------------------------------------------------------------------------------------------------------------------
Sales Growth Percentage 3.4% 2.4% 1.0% 4.6% 1.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income* 46,228 48,731 52,782 52,993 55,379
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per Share* 2.29 2.35 2.56 2.58 2.71
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures 49,174 39,195 62,402 55,384 59,693
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 522,767 524,098 499,607 458,211 423,214
- ----------------------------------------------------------------------------------------------------------------------------------
Stock Price at Year End 45 3/8 33 7/8 33 1/2 36 1/2 37 3/4
- ----------------------------------------------------------------------------------------------------------------------------------
Market Capitalization 899,151 696,470 691,909 745,075 771,648
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*FISCAL 1996 INCLUDES A ONE-TIME $14 MILLION CHARGE FOR THE SETTLEMENT OF A
LAWSUIT, REDUCING AFTER-TAX NET INCOME BY $8.4 MILLION, OR $.42 PER SHARE.
During the fiscal year, Longs Drug Stores California, Inc. formed a
wholly-owned subsidiary, Integrated Health Concepts (IHC). IHC is a pharmacy
benefit management company that will enable Longs to develop and market pharmacy
insurance programs directly to employers and managed care organizations that
need prescription services for their employees and members. IHC provides the
opportunity to preserve pharmacy profitability by managing outcomes to the
benefit of the customer at reduced costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $49.3 million at the end of fiscal 1996
from $57.5 million last year. The reduction in cash balances primarily reflects
increases in cash provided by operating activities offset by increases in
property additions and stock repurchases. Cash from operating activities
increased to $94.3 million from $84.0 million last year, reflecting strong
improvement in operating results.
Expenditures for property additions totaled $49.2 million for fiscal 1996.
This includes the addition of 15 new stores, other new stores in various stages
of construction, and technology investments. Four stores were closed this year,
including two stores in Alaska, marking our exit from that state. Capital
expenditures for fiscal 1997 are expected to remain consistent with fiscal 1996,
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 12
to 15 stores per year, excluding any potential acquisitions.
In an effort to increase shareholder value the Company continues to repurchase
stock under an authorization granted by the Board of Directors in November 1994.
During fiscal 1996 the Company repurchased 1,009,000 shares of common stock for
a total of $35.7 million.
Fiscal year 1997 will include 53 weeks (14 weeks in the fourth quarter) as the
fiscal year will end the last Thursday in January 1997.
11
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
January 25 January 26 January 27
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
---------------THOUSANDS EXCEPT PER SHARE---------------
<S> <C> <C> <C>
SALES $2,644,376 $2,558,269 $2,499,224
COST AND EXPENSES:
Cost of merchandise sold 1,946,391 1,892,851 1,863,092
Operating and administrative 470,673 458,533 439,004
Occupancy 136,484 126,054 114,877
Lawsuit settlement 14,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 76,828 80,831 82,251
TAXES ON INCOME 30,600 32,100 32,500
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 46,228 48,731 49,751
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- 3,031
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 46,228 $ 48,731 $ 52,782
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Income Before Cumulative Effect of Accounting Change $ 2.29 $ 2.35 $ 2.41
Cumulative Effect of Accounting Change -- -- .15
----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.29 $ 2.35 $ 2.56
DIVIDENDS $ 1.12 $ 1.12 $ 1.12
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 20,182 20,701 20,592
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REPORT
LONGS DRUG STORES CORPORATION:
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF LONGS DRUG
STORES CORPORATION AND ITS SUBSIDIARY AS OF JANUARY 25, 1996 AND JANUARY 26,
1995, AND THE RELATED STATEMENTS OF CONSOLIDATED INCOME, CONSOLIDATED
STOCKHOLDERS' EQUITY AND CONSOLIDATED CASH FLOWS FOR EACH OF THE THREE FISCAL
YEARS IN THE PERIOD ENDED JANUARY 25, 1996. THESE FINANCIAL STATEMENTS ARE THE
RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN
OPINION ON THESE FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED
AUDITING STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND
PERFORM THE AUDIT TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL
STATEMENTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A
TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL
STATEMENTS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND
SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL
FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A
REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, SUCH CONSOLIDATED FINANCIAL STATEMENTS PRESENT FAIRLY, IN ALL
MATERIAL RESPECTS, THE FINANCIAL POSITION OF THE COMPANIES AT JANUARY 25, 1996
AND JANUARY 26, 1995, AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED JANUARY 25, 1996 IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
AS DISCUSSED IN THE NOTE TO THE FINANCIAL STATEMENTS ENTITLED "TAXES ON
INCOME," THE COMPANY CHANGED ITS METHOD OF ACCOUNTING FOR INCOME TAXES
EFFECTIVE JANUARY 29, 1993 TO CONFORM WITH STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 109.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
SAN FRANCISCO, CALIFORNIA
FEBRUARY 23, 1996
12
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 25 January 26
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
------------THOUSANDS-----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 49,314 $ 57,518
Pharmacy and other receivables 54,388 53,904
Merchandise inventories 316,497 295,346
Deferred income taxes 23,640 17,165
Other 2,687 2,734
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 446,526 426,667
- ----------------------------------------------------------------------------------------------------------------------------------
PROPERTY:
Land 79,998 76,952
Buildings and leasehold improvements 313,766 300,602
Equipment and fixtures 247,831 240,239
Beverage licenses 7,163 7,135
- ----------------------------------------------------------------------------------------------------------------------------------
Total property - at cost 648,758 624,928
Less accumulated depreciation 253,461 227,166
- ----------------------------------------------------------------------------------------------------------------------------------
Property - net 395,297 397,762
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS 11,734 3,532
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $853,557 $827,961
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $148,428 $149,239
Employee compensation and benefits 59,843 56,274
Taxes payable 37,808 28,459
Current portion of guarantee 2,174 2,001
Other 39,094 21,908
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 287,347 257,881
- ------------------------------------------------------------------------------------------------------------------------------------
GUARANTEE OF PROFIT SHARING PLAN DEBT 8,311 11,180
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 35,132 34,802
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock (19,816,000 and 20,560,000 shares outstanding) 9,908 10,280
Additional capital 107,608 107,216
Common stock contribution to Profit Sharing Plan 4,550 5,515
Guarantee of Profit Sharing Plan debt (10,485) (13,181)
Retained earnings 411,186 414,268
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 522,767 524,098
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $853,557 $827,961
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
January 25 January 26 January 27
1996 1995 1994
-----------------------THOUSANDS---------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $ 2,645,211 $ 2,554,596 $ 2,490,558
Payments for merchandise (1,968,353) (1,901,012) (1,840,876)
Payments for operating, administrative, and occupancy expenses (551,179) (541,421) (503,891)
Income tax payments (31,380) (28,094) (31,628)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 94,299 84,069 114,163
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Payments for property additions and other assets (49,174) (39,195) (62,402)
Receipts from property dispositions 3,081 4,422 2,349
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (46,093) (34,773) (60,053)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayment of short-term borrowings -- -- (10,000)
Repayment of debt assumed from Bill's Drugs, Inc. -- -- (4,613)
Proceeds from sale of common stock to Profit Sharing Plan 2,017 -- --
Repurchase of common stock (35,730) (11,077) (7,065)
Dividend payments (22,697) (23,213) (22,990)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (56,410) (34,290) (44,668)
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (8,204) 15,006 9,442
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 57,518 42,512 33,070
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 49,314 $ 57,518 $ 42,512
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 46,228 $ 48,731 $ 52,782
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 40,356 37,811 33,241
Deferred income taxes (6,145) (2,968) 2,857
Restricted stock awards 1,478 1,889 1,350
Common stock contribution to benefit plans 4,550 5,515 5,530
Tax benefits credited to stockholders' equity 127 155 (324)
Cumulative effect of accounting change -- -- (3,031)
Changes in assets and liabilities net of effects from acquisition of
Bill's Drugs, Inc.:
Pharmacy and other receivables (484) (3,265) (8,868)
Merchandise inventories (21,151) (14,822) 4,586
Other current assets 47 (197) (433)
Current liabilities 29,293 11,220 26,473
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 94,299 $ 84,069 $ 114,163
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Profit Sharing Guarantee of Total
Common Stock Additional Plan Profit Sharing Retained Stockholders'
(THOUSANDS) Shares Amount Capital Contributions Plan Debt Earnings Equity
<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 contribution 132 66 4,709 (4,775) 0
Stock portion of FY94 contribution 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)
- -----------------------------------------------------------------------------------------------------------------------------------
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 46,228 46,228
DIVIDENDS ($1.12 PER SHARE) (22,697) (22,697)
PROFIT SHARING PLAN:
ISSUANCE OF STOCK FOR FY95 CONTRIBUTION 176 88 5,427 (5,515) 0
STOCK PORTION OF FY96 CONTRIBUTION 4,550 4,550
SALE OF STOCK TO PLAN 59 29 1,988 2,017
PURCHASE OF STOCK FROM PLAN (114) (57) (2,644) (2,700)
REDUCTION OF PLAN DEBT 2,696 2,696
RESTRICTED STOCK AWARDS 30 15 1,463 1,478
TAX BENEFITS RELATED TO EMPLOYEE STOCK PLANS 127 127
REPURCHASE OF COMMON STOCK (895) (447) (5,842) (26,740) (33,030)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 25, 1996 19,816 $ 9,908 $107,608 $4,550 ($10,485) $411,186 $522,767
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
THE CONSOLIDATED FINANCIAL STATEMENTS include Longs Drug Stores Corporation and
Longs Drug Stores California, Inc., its wholly-owned subsidiary. All
inter-company accounts and transactions have been eliminated.
FISCAL YEARS end the last Thursday of January. Certain reclassifications have
been made to the fiscal 1995 and 1994 financial statements in order to
conform to fiscal 1996 presentation.
NATURE OF OPERATIONS - The Company operates in the retail drug store industry in
California, Colorado, Hawaii, and Nevada. A majority of our sales are
concentrated in California. Our principal lines of business are prescription
drugs, over-the-counter healthcare products, photo, cosmetics and greeting
cards.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND EQUIVALENTS include all highly liquid investments with original
maturities of three months or less.
MERCHANDISE INVENTORIES are valued using the last-in, first-out (LIFO) method.
The excess of specific cost over LIFO values was $129.8 and $127.7 million at
the 1996 and 1995 year ends.
PROPERTY is depreciated using the straight-line method and estimated useful
lives of twenty to thirty-three years for buildings, the shorter of life of the
lease or estimated useful life for leasehold improvements, and three to twenty
years for equipment and fixtures. Maintenance and repairs are charged to expense
as incurred and major improvements are capitalized.
Effective October 27, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" which requires that long-lived
assets, including intangible assets, used by an entity be reviewed for
impairment whenever events or changes indicate that the carrying amount of that
asset may not be recoverable. There was no impact of adopting this
pronouncement.
OTHER NON-CURRENT ASSETS consist of pharmacy files and goodwill and are
amortized under a straight line method over estimated useful lives of five to
ten years.
NEW STORE OPENING COSTS, primarily labor to stock shelves, pre-opening
advertising and store supplies, are charged to expense as incurred.
ADVERTISING - The Company expenses costs of advertising the first time
advertising takes place. Advertising expense was $21.9, $23.3, and $20.6 million
for fiscal years 1996, 1995, and 1994, respectively.
INCOME TAXES - In fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 - "Accounting for Income Taxes" (SFAS No. 109)
which requires the use of the liability method of accounting for deferred
income taxes. Deferred income taxes are recorded based upon the differences
between the financial statement and tax basis of assets and liabilities.
STOCK BASED COMPENSATION - The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
as of January 27, 1995. SFAS No. 123 establishes accounting and disclosure
requirements using a fair value based method of accounting for stock based
employee compensation plans. Under SFAS No. 123 the Company may either adopt the
new fair value based accounting method or continue the intrinsic value based
method and provide pro forma disclosure of net income and earnings per share as
if the accounting provisions of SFAS No. 123 had been adopted. The Company
adopted only the disclosure requirements of SFAS No. 123; therefore such
adoption had no effect on the Company's consolidated net earnings or cash flows.
EARNINGS PER COMMON SHARE are calculated by dividing net income by the weighted
average number of shares outstanding.
LEASES AND OTHER OBLIGATIONS
A significant portion of store properties are leased, having original terms
ranging from ten to twenty-five years with renewal options covering up to
twenty additional years in five-year to ten-year increments. Leases provide
for minimum annual rent with provisions for additional rent based on a
percentage of sales. Lease rentals for fiscal 1996, 1995, and 1994 were
$34.5, $30.9, and $26.5 million, of which $27.5, $23.4, and $19.5 million
represent minimum payments.
Total minimum rental commitments for noncancelable leases in effect at 1996 year
end were $29.3, $29.3, $29.0, $27.9, and $27.1 million for fiscal years 1997
through 2001, and $282.4 million thereafter.
As of January 25, 1996 and January 26, 1995, the Company had an unsecured
revolving line of credit of $30.0 million with prevailing interest rates.
There was $29.8 million and $30.0 million available for use at January 25,
1996 and January 26, 1995, respectively. The line of credit expires on June
30, 1997.
EMPLOYEE COMPENSATION AND BENEFITS
The Company has approximately 16,000 full-time and part-time employees as of
January 25, 1996. Virtually all full-time employees are covered by medical,
dental, hospitalization and life insurance programs paid primarily by the
Company. The Company also has a 401(k) plan under which employees may make
voluntary contributions.
Full-time employees with over 1,000 hours of service are entitled to Profit
Sharing Plan benefits that are funded entirely by the Company. Annual
contributions to the plan were $11.0 million for the past three fiscal years.
Contributions are made in cash and common stock.
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. Resulting obligations will be payable on a date selected by the
employee participant in accordance with the terms of the plan. The total
deferred
16
<PAGE>
compensation obligations under the plan may not exceed $10.0 million. As of
January 25, 1996 there was $585,000 in compensation that had been deferred under
this plan.
TAXES ON INCOME
The cumulative effect of adopting SFAS No. 109 on the Company's consolidated
financial statements was to increase net income by $3.0 million ($.15 per
share) for the year ended January 27, 1994.
Significant components of the Company's deferred tax assets and liabilities as
of January 25, 1996 and January 26, 1995 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve for vacation pay $ 7,398 $ 6,826
Reserve for worker's compensation 7,493 6,272
State Income Tax 2,111 3,401
Lawsuit settlement 5,600 --
Other 11,139 6,119
- --------------------------------------------------------------------------------
33,741 22,618
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation 32,836 30,685
Basis of property 3,664 4,146
Inventories 1,605 663
Other 7,128 4,761
- --------------------------------------------------------------------------------
45,233 40,255
- --------------------------------------------------------------------------------
Net deferred tax liability $11,492 $17,637
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
No valuation allowances were considered necessary in the calculation of deferred
tax assets as of January 25, 1996 and January 26, 1995.
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Fiscal Years Ended
1996 1995 1994
- --------------------------------------------------------------------------------
THOUSANDS
<S> <C> <C> <C>
CURRENT
Federal $28,367 $26,992 $22,986
State 8,378 8,076 6,657
- --------------------------------------------------------------------------------
36,745 35,068 29,643
DEFERRED (6,145) (2,968) 2,857
- --------------------------------------------------------------------------------
Total $30,600 $32,100 $32,500
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The reconciliation between the federal statutory tax rate and the Company's
effective tax rates are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(THOUSANDS) FOR THE FISCAL YEAR ENDED
1996 PERCENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal income taxes
at statutory rate $26,882 35.0%
State income tax net of
federal benefits 4,388 5.7%
Benefits of ESOP dividends (1,273) (1.7%)
Other 603 0.8%
- --------------------------------------------------------------------------------
$30,600 39.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The effective tax rate in fiscal 1995 and 1994 differ from the federal statutory
rate of 35%, primarily due to state income taxes, and the benefit of ESOP
dividends.
GUARANTEE OF PROFIT SHARING PLAN DEBT
In March 1989, the Company sold 696,864 shares of Longs' common stock to the
Profit Sharing Plan for $25.0 million. The Plan financed this purchase with a
ten-year loan 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 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. Plan shares of
the leveraged Employee Stock Ownership Plan were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Allocated shares 477,717 419,119
Unallocated shares 219,147 277,745
- --------------------------------------------------------------------------------
Total 696,864 696,864
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Loan payments are made in equal quarterly installments of $930,000, which
includes interest at 8.4% per year.
Dividends paid to the Plan, and used in part to repay principal and interest on
the loan totaled $3.2 million for each of the past three fiscal years.
STOCKHOLDERS' EQUITY
Authorized capital stock consists of 120 million shares of common stock, $.50
par value, and 30 million shares of preferred stock. There were approximately
16,000 (UNAUDITED) shareholders at the end of fiscal 1996.
Each outstanding share of common stock has a Preferred Stock Purchase Right
(expiring in September 1996) which is exercisable only upon the occurrence of
certain changes in control events. There have been no events that would allow
these rights to be exercised.
During 1988, a Restricted Stock Award program was adopted whereby certain
individuals may be granted stock in the Company. The restrictions provide that
while recipients have voting rights to the shares, transfer of ownership of the
shares is dependent on continued employment for a period of five years. In 1994,
a new Restricted Stock Award program was adopted which is similar to the 1988
program except as it relates to the transfer of ownership of shares. The
transfer of shares is dependent upon continued employment for a period of not
less than one year. The portion not yet expensed for these programs ($2.8
million) at January 25, 1996 has been netted against Additional Capital. During
fiscal 1996, 1995, and 1994; 34,600, 93,400 and 11,700 shares were awarded under
these programs.
In November, 1994, the Board of Directors authorized a plan to repurchase up to
two million shares of the Company's outstanding common stock. During fiscal
1996, the Company repurchased 1,009,000 shares at a cost of $35.7 million.
Included are 114,000 shares of its common stock from the Profit Sharing Plan at
market values totalling $2.7 million and 221,000 shares of common stock from
related parties at market values totaling $7.6 million.
17
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," the carrying value of the Company's current assets and
liabilities, and Guarantee of Profit Sharing Plan debt approximates the
estimated fair value.
SETTLEMENT OF LAWSUIT
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, Harvey 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 was named in three
cross-claims by certain co-defendants in Walco. The cases alleged that investors
invested in partnerships that sold securities offering a high rate of return
from the partnership's investments 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 alleged that a
former employee of Subsidiary confirmed to the funding partnerships, on behalf
of subsidiary, nonexistent transactions; and they claimed that the subsidiary
was secondarily liable for the acts of the former employee. Several other
retailers were co-defendants in the actions. Both cases were attempts to recover
damages on behalf of essentially the same group of investors, but Walco was a
class action by investors in the funding partnerships and Tropin was an action
brought by Premium's receiver and trustee in bankruptcy. Plaintiffs in both
actions sought 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.
On February 14, 1996, the Company concluded settlement negotiations with
representatives of the plaintiffs in these actions whereby all claims against
the Company and its affiliates will be released in exchange for the Company's
cash payment of $14 million. The settlement remains subject to the completion of
a definitive settlement agreement and to court approval, in respect of which
plaintiffs have agreed to give their unconditional support. The after-tax impact
of this settlement was $8.4 million, or $.42 per share, and was accrued in
fourth quarter 1996.
ACQUISITION OF HAWAII STORES
During the first quarter of fiscal 1996 Longs Drug Stores California, Inc.,
purchased the inventory and fixed assets of six stores and the merchandise
inventory of other additional stores in Hawaii from PayLess Drug Stores
Northwest, Inc.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS DIVIDENDS STOCK
SALES GROSS PROFIT NET INCOME(1) PER SHARE(1) PER SHARE PRICE RANGE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter 1 $ 639,801 $169,232 $13,304 $ .65 $.28 $31-34
Quarter 2 646,359 171,012 12,486 .62 .28 33-38
Quarter 3 628,900 166,643 8,815 .44 .28 36-42
Quarter 4 729,316 191,098 11,623 .58 .28 38-48
- --------------------------------------------------------------------------------------------------------------
FYE 1996 2,644,376 697,985 46,228 2.29 1.12 31-48
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Quarter 1 622,259 164,990 13,021 .63 .28 31-32
Quarter 2 626,310 163,124 12,034 .58 .28 33-34
Quarter 3 614,461 156,302 6,422 .31 .28 33-34
Quarter 4 695,239 181,002 17,254 .83 .28 33-34
- --------------------------------------------------------------------------------------------------------------
FYE 1995 2,558,269 665,418 48,731 2.35 1.12 31-34
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996(1) 1995 1994(2) 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $2,644,376 $2,558,269 $2,499,224 $2,475,475 $2,365,916
Net Income 46,228 48,731 52,782 52,993 55,379
Earnings per Share 2.29 2.35 2.56 2.58 2.71
Dividends per Share 1.12 1.12 1.12 1.11 1.07
Total Assets 853,557 827,961 794,804 726,190 689,251
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES $14 MILLION LAWSUIT SETTLEMENT IN FOURTH QUARTER AND FISCAL YEAR
1996, REDUCING AFTER-TAX NET INCOME BY $8.4 MILLION, OR $ .42 PER SHARE.
(2) INCLUDES CUMULATIVE EFFECT OF ACCOUNTING CHANGE, INCREASING NET INCOME BY $3
MILLION, OR $ .15 PER SHARE.
18
<PAGE>
BOARD OF DIRECTORS
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
ROBERT M. LONG STEPHEN D. ROATH RICHARD M. BROOKS* WILLIAM G. COMBS
CHAIRMAN OF THE PRESIDENT FINANCIAL CONSULTANT RETIRED
BOARD AND CHIEF VICE PRESIDENT,
EXECUTIVE OFFICER ADMINISTRATION
[PHOTO] [PHOTO] [PHOTO]
DAVID G. DESCHANE EDWARD E. JOHNSTON* MARY S. METZ, PH.D.*
RETIRED INSURANCE CONSULTANT DEAN, U.C. BERKELEY
VICE PRESIDENT EXTENSION
DISTRICT MANAGER
[PHOTO] [PHOTO] [PHOTO]
RONALD A. PLOMGREN GERALD H. SAITO HAROLD R. SOMERSET*
SENIOR VICE PRESIDENT, SENIOR VICE PRESIDENT BUSINESS CONSULTANT
DEVELOPMENT DISTRICT MANAGER
[PHOTO] [PHOTO] [PHOTO]
DONALD L. SORBY, PH.D. THOMAS R. SWEENEY FREDERICK E. TROTTER*
DEAN EMERITUS OF RETIRED PRESIDENT,
SCHOOL OF PHARMACY VICE PRESIDENT F.E. TROTTER INC.
UNIVERSITY OF THE PACIFIC DISTRICT MANAGER
SENIOR OFFICERS OF LONGS DRUG STORES CALIFORNIA, INC.
BILL M. BRANDON RONALD A. PLOMGREN**
SENIOR VICE PRESIDENT SENIOR VICE PRESIDENT, DEVELOPMENT
GEORGE A. DUEY STEPHEN D. ROATH**
SENIOR VICE PRESIDENT PRESIDENT
DAVE J. FONG GERALD H. SAITO
SENIOR VICE PRESIDENT, PHARMACY SENIOR VICE PRESIDENT/DISTRICT MANAGER
ORLO D. JONES** DAN R. WILSON
SENIOR VICE PRESIDENT, PROPERTIES SENIOR VICE PRESIDENT, MARKETING
AND SECRETARY
ROBERT M. LONG**
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
OFFICERS OF LONGS DRUG STORES CALIFORNIA, INC.
LES C. ANDERSON RON E. LOVELADY
VICE PRESIDENT, PERSONNEL VICE PRESIDENT/DISTRICT MANAGER
AL A. ARRIGONI SAL PETRUCELLI
VICE PRESIDENT, CONSTRUCTION VICE PRESIDENT/DISTRICT MANAGER
TERRY D. BURNSIDE MIKE K. RAPHEL
VICE PRESIDENT, MERCHANDISE VICE PRESIDENT, REAL ESTATE
JACK G. DALETH CLAY E. SELLAND**
VICE PRESIDENT/DISTRICT MANAGER TREASURER, ASSISTANT SECRETARY
DON D. ENGLAND KYLE J. WESTOVER
VICE PRESIDENT/DISTRICT MANAGER VICE PRESIDENT, TRAINING AND
COMMUNICATIONS
JIM L. FAMINI
VICE PRESIDENT/DISTRICT MANAGER GROVER L. WHITE**
VICE PRESIDENT, CONTROLLER
BRIAN E. KILCOURSE ASSISTANT SECRETARY
VICE PRESIDENT
CHIEF INFORMATION OFFICER BOB W. WILSON
VICE PRESIDENT/DISTRICT MANAGER
* MEMBER OF THE AUDIT COMMITTEE
** ALSO AN OFFICER OF LONGS DRUG STORES CORPORATION
<PAGE>
GENERAL OFFICE
141 North Civic Drive
P.O. Box 5222
Walnut Creek, California 94596
(510) 937-1170
TRANSFER AGENT & REGISTRAR
Chemical Mellon Shareholder Services
50 California Street
10th Floor
San Francisco, California 94111
(800) 356-2017
For assistance on address change,
consolidation of multiple holdings,
dividend payments or related matters,
please contact the Transfer Agent.
ANNUAL MEETING
The Annual Meeting of Stockholders will
be held at the Regional Center for the
Arts, 1601 Civic Drive, Walnut Creek,
California on May 21, 1996, at 11:00 am.
All stockholders are cordially invited
to attend.
AUDITORS
Deloite & Touche LLP
50 Fremont Street
San Francisco, California 94105
[PHOTO]
GENERAL COUNSEL
- - OUR EIGHTH STORE IN
FRESNO, CALIFORNIA Bell, Rosenberg & Hughes
OPENED IN SEPTEMBER 1300 Clay Street
OF LAST YEAR. Suite 1000
Oakland, California 94612-0220
STOCK LISTING
New York Stock Exchange, Inc.
Ticker Symbol-LDG
Newspaper quotations;
"Longs Drg" W.S.J.
FORM 10-K
A copy of the Company's Form 10-K Annual
Report and Form 10-Q Quarterly Reports
filed with the Securities and Exchange
Commission may be obtained without
charge by writing to the Corporate
Treasurer, Longs Drug Stores, P.O. Box
5222, Walnut Creek, California 94596
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