<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended October 30, 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
- ----------------------------------------- ------------------
(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
--------------
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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 38,629,877 shares of common stock outstanding as of December 8, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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STATEMENTS OF CONDENSED CONSOLIDATED INCOME (UNAUDITED)
<TABLE>
<CAPTION>
For the For the Three
Quarter Ended Quarters Ended
OCTOBER 30 October 24 OCTOBER 30 October 24
1997 1996 1997 1996
---------- ---------- ---------- ----------
-------------(Thousands Except Per Share)--------------
<S> <C> <C> <C> <C>
SALES $ 714,597 $ 666,909 $2,143,797 $2,013,820
COSTS AND EXPENSES:
Cost of merchandise sold 524,988 490,451 1,575,343 1,474,812
Operating and administrative 173,114 160,884 508,614 477,574
---------- ---------- ---------- ----------
INCOME BEFORE TAXES ON INCOME 16,495 15,574 59,840 61,434
TAXES ON INCOME 6,500 6,200 23,500 24,500
---------- ---------- ---------- ----------
NET INCOME $ 9,995 $ 9,374 $ 36,340 $ 36,934
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER COMMON SHARE:
NET INCOME $ .26 $ .24 $ .93 $ .94
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DIVIDENDS $ .14 $ .14 $ .42 $ .42
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 38,769 39,070 39,012 39,410
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-1-
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 30 October 24 January 30
1997 1996 1997
---------- ---------- ----------
---------------(Thousands)--------------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and equivalents $ 14,934 $ 31,885 $ 22,834
Pharmacy and other receivables 59,375 49,169 49,911
Merchandise inventories 361,629 358,550 356,933
Deferred income taxes 20,601 24,105 19,757
Other 990 1,878 1,939
---------- ---------- ----------
Total current assets 457,529 465,587 451,374
---------- ---------- ----------
PROPERTY:
Land 91,266 78,761 88,269
Buildings and leasehold improvements 356,205 324,173 337,486
Equipment and fixtures 286,033 265,583 270,337
Beverage licenses 7,384 7,226 7,240
---------- ---------- ----------
Total property--at cost 740,888 675,743 703,332
Less accumulated depreciation 309,889 277,606 285,943
---------- ---------- ----------
Property--net 430,999 398,137 417,389
---------- ---------- ----------
OTHER NON-CURRENT ASSETS 10,533 11,404 10,886
---------- ---------- ----------
TOTAL $ 899,061 $ 875,128 $ 879,649
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 164,292 $ 166,630 $ 164,369
Short-term borrowings 13,039 9,900 ----
Employee compensation and benefits 66,640 60,244 55,957
Taxes payable 30,512 26,557 34,294
Current portion of guarantee 3,319 3,054 2,363
Other 30,599 41,005 29,526
---------- ---------- ----------
Total current liabilities 308,401 307,390 286,509
---------- ---------- ----------
GUARANTEE OF PROFIT SHARING PLAN DEBT 2,677 5,996 5,192
---------- ---------- ----------
DEFERRED INCOME TAXES 28,040 33,786 34,362
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock (38,767,000, 39,070,000,
and 38,968,000 shares outstanding) 19,384 9,767 19,484
Additional capital 112,774 110,246 109,327
Common stock contribution to Profit Sharing Plan ---- ---- 9,955
Guarantee of Profit Sharing Plan debt (5,996) (9,050) (7,555)
Retained earnings 433,781 416,993 422,375
---------- ---------- ----------
Total stockholders' equity 559,943 527,956 553,586
---------- ---------- ----------
TOTAL $ 899,061 $ 875,128 $ 879,649
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Quarters Ended
OCTOBER 30 October 24
1997 1996
---------- ----------
---------(Thousands)----------
OPERATING ACTIVITIES:
<S> <C> <C>
Receipts from customers $2,133,960 $2,018,664
Payments for merchandise (1,580,116) (1,498,664)
Payments for operating and administrative expenses (467,250) (441,710)
Income tax payments (28,365) (37,071)
---------- ----------
Net cash provided by operating activities 58,229 41,219
---------- ----------
INVESTING ACTIVITIES:
Payments for property additions and other assets (48,049) (38,844)
Receipts from property dispositions 2,008 4,273
---------- ----------
Net cash used in investing activities (46,041) (34,571)
---------- ----------
FINANCING ACTIVITIES:
Repurchase of common stock (16,732) (19,393)
Dividend payments (16,395) (16,584)
Proceeds from borrowings 13,039 9,900
Proceeds from sale of common stock to Profit Sharing Plan ---- 2,000
---------- ----------
Net cash used in financing activities (20,088) (24,077)
---------- ----------
DECREASE IN CASH AND EQUIVALENTS (7,900) (17,429)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 22,834 49,314
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 14,934 $ 31,885
---------- ----------
---------- ----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 36,340 $ 36,934
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 32,784 32,062
Deferred income taxes (7,166) (1,811)
Restricted stock awards 1,537 1,222
Tax benefits credited to stockholders' equity 48 70
Changes in assets and liabilities:
Pharmacy and other receivables (9,464) 5,219
Merchandise inventories (4,696) (42,053)
Other current assets 949 809
Current liabilities 7,897 8,767
---------- ----------
Net cash provided by operating activities $ 58,229 $ 41,219
---------- ----------
---------- ----------
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 30, 1997 and Three Quarters Ended October 30, 1997
<TABLE>
<CAPTION>
PROFIT GUARANTEE
SHARING OF PROFIT TOTAL
COMMON STOCK ADDITIONAL PLAN SHARING RETAINED STOCKHOLDERS'
------------ CAPITAL CONTRIBUTIONS PLAN DEBT EARNINGS EQUITY
SHARES AMOUNT
(Thousands)
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BALANCE AT JANUARY 25, 1996 39,632 $19,816 $107,608 $4,550 ($10,485) $401,278 $522,767
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income 58,612 58,612
Dividends ($.56 per share) (22,054) (22,054)
Profit Sharing Plan:
Issuance of stock for FY96
contributions 181 91 4,010 (4,055) (46) 0
Contribution in cash (495) (495)
Stock portion of FY96 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 $553,586
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UNAUDITED:
Net income 36,340 36,340
Dividends ($.42 per share) (16,395) (16,395)
Profit Sharing Plan:
Issuance of stock for FY97
contributions 376 188 9,767 (9,955) 0
Purchase of stock from plan (267) (133) (6,783) (6,916)
Reduction of plan debt 1,559 1,559
Restricted stock awards 89 44 1,493 1,537
Tax benefits related to employee stock
plans 48 48
Repurchase of common stock (399) (199) (1,030) (8,587) (9,816)
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BALANCE AT OCTOBER 30, 1997 38,767 $19,384 $112,774 $ 0 $(5,996) $433,781 $559,943
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed 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 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 condensed consolidated financial statements for the periods
ended October 30, 1997 and October 24, 1996 are unaudited. The Condensed
Consolidated Balance Sheet at January 30, 1997, and Condensed Consolidated
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 $138.6 million at October 30, 1997, $132.5 million at
October 24, 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 $17.0 million available for use at October 30, 1997. As of
November 26, 1997, the line of credit was increased to $65.0 million and
expires on August 31, 2002.
5. During the first three quarters of fiscal year 1998, the Company
repurchased 267,000 shares of common stock from the Profit Sharing Plan at
market values totaling $6.9 million and 399,000 common shares from the T.
J. and V. M. Long Foundations at market values totaling $9.8 million.
6. In February 1997 a new statement, EARNINGS PER SHARE (Financial Accounting
Standard No. 128), was issued effective for interim and annual periods
ending after December 15, 1997. This statement supersedes APB Opinion 15
and specifies the computation, presentation and disclosure requirements for
earnings per share. The changes required by this statement will not
materially affect the Company's earnings per share.
7. In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, REPORTING COMPREHENSIVE INCOME, which requires that a company
report, by major components and as a single total, the change in its net
assets during the period from nonowner sources; and No. 131 DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION which establishes
annual and interim reporting standards for a company's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash
flows, and the effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997.
8. On November 6, 1997, Longs Drug Stores and American Stores Company
announced the merger of their pharmacy benefits management (PBM)
subsidiaries. The joint venture agreement combines the operations of
Integrated Health Concepts (IHC), the PBM subsidiary of Longs and
RxAmerica, the PBM subsidiary of American Stores. The new joint venture
has retained the name RxAmerica.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Third quarter sales increased 7.2% to $714.6 million, with same-store sales
growing 5% for the quarter. Sales for the three quarters increased 6.5% to
$2.14 billion. Increases in average script price and in the number of
prescriptions filled contributed to an increase in pharmacy sales with a portion
coming from mail order pharmacy.
Pharmacy sales increased 13.4% compared to the same quarter last year and 11.9%
year-to-date. Pharmacy represented 35.7% of total sales in third quarter, up
from 33.7% in the prior year. Pharmacy sales reimbursed through third party
arrangements grew to 83.0% of total pharmacy sales compared to 79.4% in the same
quarter last year.
GROSS MARGINS
Gross margin (including LIFO) was 26.5% for the quarter, consistent with a year
ago. Pharmacy margins continue to decline as third party sales represent a
larger portion of pharmacy sales. The downward trend in pharmacy margins and an
upward trend in average script price is expected to continue throughout the
fiscal year. Non-pharmacy margins increased during third quarter and are
expected to continue to increase through year-end due to better acquisition of
product, improved promotional margins, and growth in categories carrying higher
margins.
The Company uses the Last-In First-Out (LIFO) method of inventory valuation.
The LIFO provision was $2.9 million in third quarter as compared to no provision
in the prior year due in part to higher inflation in pharmacy goods. Year-to-
date LIFO provision was $5.4 million as compared to $2.7 million for the same
period last year.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percent of sales were 24.2%, which is
slightly higher than 24.1% in the prior year quarter but was in line with plan.
Third quarter included the expenses associated with opening two new stores
compared to four new stores opening in third quarter last year.
Year-to-date operating and administrative expenses as a percent of sales
remained consistent with last year at 23.7%.
OPERATING/NET INCOME
Operating income as a percent of sales for the quarter remained consistent with
prior year quarter at 2.3%. Net income as a percent of sales also remained
consistent with prior year quarter at 1.4%.
Net income for the three quarters decreased 1.6% to $36.3 million. Earnings per
share increased at a greater rate than net income due to share repurchases.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash provided by operating activities increased compared to the prior year
primarily due to less investment in warehouse and store inventory as a result of
several initiatives to optimize inventory investment.
-6-
<PAGE>
Payments for property additions for the three quarters increased $9.2 million
compared to last year. The Company expects to open a total of fourteen 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, new stores,
and fixture remodels to facilitate category management implementation and
continued information system enhancements.
At quarter end, the Company borrowed $13 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 $17 million. This line was increased
to $65.0 million subsequent to quarter end.
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.
IHC/RXAMERICA MERGER
The PBM subsidiaries from Longs and American Stores merged to form a joint
venture effective November 1, 1997. Benefits from the merger include
synergistic and complementary business objectives--including IHC's expertise in
marketing patient care initiatives to employer groups along with RxAmerica's
processing capabilities and mail order pharmacy. Ongoing development costs now
can be shared. The overall objective is to better manage third party contracts
to maximize profitability. Longs and American Stores retail outlets will
continue to compete directly at the retail level. Longs contributed the assets
of IHC, the inventory and assets of the mail-order operations, cash and note to
the joint venture. Longs will no longer separately recognize sales from its
retail mail-order operation or direct expenses relating to IHC and mail order.
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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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter
ended October 30, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LONGS DRUG STORES CORPORATION
---------------------------------------------
(REGISTRANT)
Date December 15, 1997 /s/ G. L. White
-------------------------- ---------------------------------------------
G. L. White
Vice President, Controller
/s/ R. A. Plomgren
---------------------------------------------
R. A. Plomgren
Senior Vice President, Development
and Chief Financial Officer and Director
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> OCT-30-1997
<CASH> 14,934
<SECURITIES> 0
<RECEIVABLES> 59,375
<ALLOWANCES> 0
<INVENTORY> 361,629
<CURRENT-ASSETS> 457,529
<PP&E> 740,888
<DEPRECIATION> 309,889
<TOTAL-ASSETS> 899,061
<CURRENT-LIABILITIES> 308,401
<BONDS> 0
0
0
<COMMON> 19,384
<OTHER-SE> 540,559
<TOTAL-LIABILITY-AND-EQUITY> 899,061
<SALES> 2,143,797
<TOTAL-REVENUES> 0
<CGS> 1,575,343
<TOTAL-COSTS> 2,083,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 59,840
<INCOME-TAX> 23,500
<INCOME-CONTINUING> 36,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,340
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
