<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 May 1, 1997
/ / 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (510) 937-1170
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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 39,215,193 shares of common stock outstanding as of June 10, 1997.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
For the Quarters Ended
May 1 April 25
1997 1996
----------- -----------
----(Thousands Except Per Share)----
SALES $ 710,934 $ 665,408
COSTS AND EXPENSES:
Cost of merchandise sold 522,156 484,577
Operating and administrative 165,598 157,383
-------- --------
INCOME BEFORE TAXES ON INCOME 23,180 23,448
TAXES ON INCOME 9,100 9,400
-------- --------
NET INCOME $ 14,080 $ 14,048
-------- --------
-------- --------
PER COMMON SHARE:
NET INCOME $ .36 $ .35
-------- --------
-------- --------
DIVIDENDS $ .14 $ .14
-------- --------
-------- --------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 39,179 39,736
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
May 1 April 25 January 30
1997 1996 1997
---------- ---------- ----------
------------------(Thousands)----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 14,635 $ 55,799 $ 22,834
Pharmacy and other receivables 53,465 51,460 49,911
Merchandise inventories 344,753 317,731 356,933
Deferred income taxes 18,760 24,766 19,757
Other 1,261 1,718 1,939
-------- -------- --------
Total current assets 432,874 451,474 451,374
-------- -------- --------
PROPERTY:
Land 88,857 79,391 88,269
Buildings and leasehold improvements 342,732 313,554 337,486
Equipment and fixtures 273,481 253,273 270,337
Beverage licenses 7,334 7,189 7,240
-------- -------- --------
Total property--at cost 712,404 653,407 703,332
Less accumulated depreciation 294,379 260,280 285,943
-------- -------- --------
Property--net 418,025 393,127 417,389
OTHER NON-CURRENT ASSETS 10,859 11,376 10,886
-------- -------- --------
TOTAL $ 861,758 $ 855,977 $ 879,649
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 133,974 $ 146,727 $ 164,369
Short-term borrowings 17,134 -- --
Employee compensation and benefits 59,550 58,524 55,957
Taxes payable 23,594 39,612 34,294
Current portion of guarantee 3,184 2,930 2,363
Other 27,591 39,240 29,526
-------- -------- --------
Total current liabilities 265,027 287,033 286,509
-------- -------- --------
GUARANTEE OF PROFIT SHARING PLAN DEBT 4,371 7,555 5,192
-------- -------- --------
DEFERRED INCOME TAXES 32,964 34,988 34,362
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock (39,267,000, 39,638,000,
and 38,968,000 shares outstanding) 19,634 19,818 19,484
Additional capital 116,501 110,409 109,327
Common stock contribution to Profit Sharing Plan -- -- 9,955
Guarantee of Profit Sharing Plan debt (7,555) (10,485) (7,555)
Retained earnings 430,816 406,659 422,375
-------- -------- --------
Total stockholders' equity 559,396 526,401 553,586
-------- -------- --------
TOTAL $ 861,758 $ 855,977 $ 879,649
-------- -------- --------
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Quarters Ended
May 1 April 25
1997 1996
-------------------------------
----------(Thousands)----------
<S> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $ 707,895 $ 669,547
Payments for merchandise (540,371) (487,512)
Payments for operating and administrative expenses (171,946) (150,161)
Income tax payments (944) (6,967)
--------- ---------
Net cash provided (used) by operating activities (5,366) 24,907
--------- ---------
INVESTING ACTIVITIES:
Payments for property additions and other non-current assets (11,643) (10,510)
Receipts from property dispositions 448 2,422
--------- ---------
Net cash used in investing activities (11,195) (8,088)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings 17,134 --
Repurchase of common stock (3,290) (4,768)
Dividend payments (5,482) (5,566)
--------- ---------
Net cash provided (used) by financing activities 8,362 (10,334)
--------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (8,199) 6,485
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 22,834 49,314
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 14,635 $ 55,799
--------- ---------
--------- ---------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 14,080 $ 14,048
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,586 10,616
Deferred income taxes (401) (1,270)
Restricted stock awards 484 390
Common stock contribution to benefit plan -- (495)
Tax benefits credited to stockholders' equity 18 25
Changes in assets and liabilities:
Pharmacy and other receivables (3,554) 2,928
Merchandise inventories 12,180 (1,234)
Other current assets 678 969
Current liabilities (39,437) (1,070)
--------- ---------
Net cash provided (used) by operating activities $ (5,366) $ 24,907
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 30, 1997 and Quarter Ended May 1, 1997
<TABLE>
<CAPTION>
PROFIT GUARANTEE
COMMON STOCK SHARING OF PROFIT TOTAL
--------------- ADDITIONAL PLAN SHARING RETAINED STOCKHOLDERS'
(Thousands) SHARES AMOUNT CAPITAL CONTRIBUTIONS PLAN DEBT EARNINGS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
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BALANCE AT JANUARY 25, 1996 39,632 $19,816 $107,608 $ 4,550 ($10,485) $401,278 $522,767
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Net income 58,612 58,612
Dividends ($.56 per share) (22,054) (22,054)
Profit Sharing Plan:
Issuance of stock for FY96 contribution 181 91 4,010 (4,055) (46) 0
Contribution in cash (495) (495)
Stock portion of FY97 contribution 9,955 9,955
Sale of stock to plan 90 45 1,978 (23) 2,000
Purchase of stock from plan (179) (90) (3,925) 45 (3,970)
Reduction of plan debt 2,930 2,930
Restricted stock awards 72 36 1,651 (18) 1,669
Tax benefits related to employee stock plans 90 90
Repurchase of common stock (828) (414) (1,995) (15,509) (17,918)
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BALANCE AT JANUARY 30, 1997 38,968 $19,484 $109,327 $9,955 ($7,555) $422,375 $553,586
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UNAUDITED:
Net income 14,080 14,080
Dividends ($.14 per share) (5,482) (5,482)
Profit Sharing Plan:
Issuance of stock for FY97 contribution 375 188 9,767 (9,955) 0
Purchase of stock from plan (119) (60) (3,030) (3,090)
Restricted stock awards 51 26 458 484
Tax benefits related to employee stock plans 18 18
Repurchase of common stock (8) (4) (21) (175) (200)
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BALANCE AT MAY 1, 1997 39,267 $19,634 $116,501 $ 0 ($7,555) $430,816 $559,396
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include Longs Drug Stores Corporation
(Company) and its wholly-owned subsidiary, Longs Drug Stores California,
Inc. All inter-company 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 30, 1997, 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 May 1, 1997, and April 25,
1996, are unaudited. The Balance Sheet at January 30, 1997, 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 $133.8 million at May 1, 1997, $131.0 million at April
26, 1996, and $133.2 million at January 30, 1997. 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 has an unsecured revolving line of credit of $30.0 million at
prevailing interest rates. The line of credit expires on June 30, 1998.
There was $12.9 million available for use at May 1, 1997.
5. During the first quarter of fiscal year 1998, the Company repurchased
119,000 shares of common stock from the Profit Sharing Plan at market
values totaling $3.1 million and 8,000 shares of common stock from the V.M.
Long Charitable Foundation at market values totaling $0.2 million.
6. The legal settlement, as described in the fiscal year 1997 Annual Report on
page 20, has received final court approval and is the subject of a
definitive settlement agreement, but will not become finally effective
until required releases are delivered and other contingencies have been
resolved.
7. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE.
SFAS 128 requires dual presentation of basic EPS and diluted EPS on the
face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur from common shares issuable through stock options, restricted stock,
warrants and other convertible securities. The Company does not anticipate
the effect on earnings per share to be material.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
First quarter sales increased 6.8% to $710.9 million, with same store sales
growing 5.5% for the quarter. Contributing to the increase in same store sales
were strong pharmacy sales, sales in stores less than three years old and
increased sales through the Company's mail order pharmacy.
Pharmacy sales increased 12.8% for the quarter due to growth in prescription
volume and sales of more expensive medications, particularly allergy products.
Pharmacy represented 36.1% of total sales in first quarter, up from 34.2% in the
prior year. Pharmacy sales reimbursed through third party arrangements grew to
81.5% of total pharmacy sales compared to 77.7% in the prior year quarter.
GROSS MARGINS
Gross margin was 26.6% for the quarter, down from 27.2% a year ago. Pharmacy
margins continue to decline as third party sales become a larger portion of
pharmacy sales and as pharmacy sales become a larger portion of overall sales.
Contributing to the decline in pharmacy margins was a shift in pharmacy product
mix towards more expensive prescriptions. Non-pharmacy margins were comparable
to the prior year quarter.
The Company uses the Last-In First-Out (LIFO) method of inventory valuation.
The LIFO provision was $600 thousand in first quarter compared to $1.2 million
in the prior year quarter, due to lower inflation in pharmacy goods.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percent of sales were 23.3% as
compared to 23.7% in the prior year quarter, benefiting from the increase in
sales.
OPERATING/NET INCOME
Operating income as a percent of sales for the quarter declined to 3.3% compared
to 3.5% in the prior year primarily due to softer margins. Net income as a
percent of sales declined slightly to 2.0% from 2.1% in the prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash used in operating activities increased compared to the prior year quarter
primarily due to increased payments for merchandise and an increase in payments
for operating and administrative expenses, resulting from the level of accounts
payable at the end of fourth quarter 1997 compared to fourth quarter 1996.
Payments for property additions for the first quarter increased $1.1 million
compared to the prior year quarter. The number of stores in operation increased
by ten from 329 to 339 since first quarter last year. The Company expects to
open seventeen stores and close two stores in fiscal year 1998. Capital
expenditures are expected to increase this year primarily due to construction of
a new warehouse and new stores, increases in remodeling expenditures supporting
category management expansion and continued information system enhancements.
Stock repurchases were $3.3 million for the quarter compared to $4.8 million in
prior year quarter.
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At quarter end, the Company borrowed $17.1 million on an unsecured revolving
line of credit at prevailing interest rates to meet working capital needs. The
unused portion of the line of credit was $12.9 million at the end of first
quarter.
Expenditures for capital projects, dividends, and stock repurchases are expected
to continue to be funded from operations, cash reserves, and short-term
borrowings as deemed necessary.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements regarding the Company's
expected performance for future periods including same store sales and new store
openings. Actual results for such periods may materially differ. Such
forward-looking statements involve risks and uncertainties, including risks for
changing market conditions in the overall economy and the retail industry,
consumer demand, the opening of new stores, actual advertising expenditures by
the Company, the success of the Company's advertising and merchandising strategy
and other factors detailed from time to time in the Company's annual and other
reports filed with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required by this item is incorporated by reference within
Part I (page 5) to Form 10-Q.
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
May 1, 1997.
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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 June 12, 1997 /s/ G. L. White
--------------------- -------------------------------------
G. L. White
Vice President, Controller
(PRINCIPAL ACCOUNTING OFFICER)
/s/ R. A. Plomgren
-------------------------------------
R. A. Plomgren
Senior Vice President -- Development
(CHIEF FINANCIAL OFFICER)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> MAY-01-1997
<CASH> 14,635
<SECURITIES> 0
<RECEIVABLES> 53,465
<ALLOWANCES> 0
<INVENTORY> 344,753
<CURRENT-ASSETS> 432,874
<PP&E> 712,404
<DEPRECIATION> 294,379
<TOTAL-ASSETS> 861,758
<CURRENT-LIABILITIES> 265,027
<BONDS> 0
0
0
<COMMON> 19,634
<OTHER-SE> 539,762
<TOTAL-LIABILITY-AND-EQUITY> 861,758
<SALES> 710,934
<TOTAL-REVENUES> 0
<CGS> 522,156
<TOTAL-COSTS> 687,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,180
<INCOME-TAX> 9,100
<INCOME-CONTINUING> 14,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,080
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
