<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 April 30, 1998
/ / 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: (925) 937-1170
--------------
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------
There were 38,908,319 shares of common stock outstanding as of May 28, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
For the Quarter Ended
<TABLE>
<CAPTION>
April 30, May 1,
1998 1997
--------- ---------
--(Thousands Except Per Share)--
<S> <C> <C>
SALES $ 752,799 $ 710,934
COSTS AND EXPENSES:
Cost of merchandise sold 550,835 522,156
Operating and administrative 178,638 165,511
Net interest expense 36 87
--------- ---------
INCOME BEFORE TAXES ON INCOME 23,290 23,180
TAXES ON INCOME 9,100 9,100
--------- ---------
NET INCOME $ 14,190 $ 14,080
--------- ---------
--------- ---------
NET INCOME PER COMMON SHARE:
BASIC $ .37 $ .36
DILUTED $ .37 $ .36
DIVIDENDS $ .14 $ .14
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
BASIC 38,469 38,851
DILUTED 38,619 38,997
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-1-
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, May 1, January 29,
1998 1997 1998
--------- --------- ---------
------------(Thousands)------------
-----(Unaudited)-----
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 34,325 $ 14,635 $ 48,552
Pharmacy and other receivables 64,808 53,465 63,107
Merchandise inventories 333,124 344,753 345,082
Deferred income taxes 24,003 18,760 23,244
Other 1,195 1,261 1,337
--------- --------- ---------
Total current assets 457,455 432,874 481,322
--------- --------- ---------
PROPERTY:
Land 92,530 88,857 90,428
Buildings and leasehold improvements 368,875 342,732 361,635
Equipment and fixtures 294,682 273,481 287,675
Beverage licenses 7,520 7,334 7,468
--------- -------- ---------
Total property--at cost 763,607 712,404 747,206
Less accumulated depreciation 320,336 294,379 312,112
--------- --------- ---------
Property--net 443,271 418,025 435,094
OTHER NON-CURRENT ASSETS 29,572 10,859 29,873
--------- --------- ---------
TOTAL $930,298 $861,758 $ 946,289
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $164,191 $133,974 $ 170,855
Short-term borrowings -- 17,134 --
Employee compensation and benefits 66,951 59,550 63,300
Taxes payable 31,416 23,594 46,079
Current portion of long-term debt and guarantee
of Profit Sharing Plan debt 4,111 3,184 3,210
Other 25,948 22,480 29,325
--------- --------- ---------
Total current liabilities 292,617 259,916 312,769
--------- --------- ---------
GUARANTEE OF PROFIT SHARING PLAN DEBT 911 4,371 1,803
LONG-TERM DEBT 13,968 -- 14,219
DEFERRED INCOME TAXES AND OTHER
LONG-TERM LIABILITIES 32,537 38,075 33,355
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock (38,907,000, 39,267,000,
and 38,629,000 shares outstanding) 19,453 19,634 19,315
Additional capital 117,542 116,501 110,466
Common stock contribution to Profit Sharing Plan -- -- 9,856
Guarantee of Profit Sharing Plan debt (4,371) (7,555) (4,371)
Retained earnings 457,641 430,816 448,877
--------- --------- ---------
Total stockholders' equity 590,265 559,396 584,143
--------- --------- ---------
TOTAL $930,298 $861,758 $ 946,289
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarters Ended
APRIL 30, May 1,
1998 1997
--------- ---------
-----(Thousands)------
<S> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $ 751,835 $ 707,895
Payments for merchandise (545,542) (540,371)
Payments for operating and
administrative expenses (183,377) (171,946)
Income tax payments (8,317) (944)
--------- ---------
Net cash provided by (used in)
operating activities 14,599 (5,366)
--------- ---------
INVESTING ACTIVITIES:
Payments for property additions and other assets (20,120) (11,643)
Receipts from property dispositions 419 448
--------- ---------
Net cash used in investing activities (19,701) (11,195)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings -- 17,134
Principal payments on long-term borrowings (271) --
Repurchase of common stock (3,418) (3,290)
Dividend payments (5,436) (5,482)
--------- ---------
Net cash provided by (used in)
financing activities (9,125) 8,362
--------- ---------
DECREASE IN CASH AND EQUIVALENTS (14,227) (8,199)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 48,552 22,834
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 34,325 $ 14,635
--------- ---------
--------- ---------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 14,190 $ 14,080
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,826 10,586
Deferred income taxes and other (1,577) 18
Restricted stock awards 576 484
Common stock contribution to benefit plan
and tax benefits credited to stockholders'
equity 300 18
Changes in assets and liabilities:
Pharmacy and other receivables (1,701) (3,554)
Merchandise inventories 11,958 12,180
Other current assets 142 678
Current liabilities (21,025) (39,856)
--------- ---------
Net cash provided by (used in)
operating activities $ 14,599 $ (5,366)
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 29, 1998 and Quarter Ended April 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK GUARANTEE
CONTRIBUTIONS OF PROFIT TOTAL
COMMON STOCK ADDITIONAL TO PROFIT SHARING RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARING PLAN PLAN DEBT EARNINGS EQUITY
(Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 30, 1997 38,968 $19,484 $109,327 $ 9,955 ($7,555) $422,375 $553,586
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 57,726 57,726
Dividends ($.56 per share) (21,808) (21,808)
Profit Sharing Plan:
Issuance of stock for FY97 contribution 375 188 9,767 (9,955) 0
Stock portion of FY98 contribution 9,856 9,856
Purchase of stock from plan (368) (184) (9,531) (9,715)
Reduction of plan debt 3,184 3,184
Restricted stock awards, net 88 44 2,021 2,065
Tax benefits related to employee stock plans 61 61
Repurchase of common stock (434) (217) (1,118) (9,477) (10,812)
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BALANCE AT JANUARY 29, 1998 38,629 19,315 110,466 9,856 (4,371) 448,877 584,143
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UNAUDITED:
Net income 14,190 14,190
Dividends ($.14 per share) (5,436) (5,436)
Profit Sharing Plan:
Issuance of stock for FY98 contribution 309 154 9,902 (9,856) 200
Purchase of stock from plan (105) (53) (3,365) (3,418)
Restricted stock awards, net 74 37 539 576
Tax benefits related to employee stock plans 10 10
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BALANCE AT APRIL 30, 1998 38,907 $19,453 $117,542 $ 0 ($4,371) $457,641 $590,265
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Condensed 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 29, 1998, 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 April 30, 1998, and May 1, 1997, are unaudited. The
Consolidated Balance Sheet at January 29, 1998, and Consolidated Statement
of Stockholders' Equity for the year then ended, presented herein, have
been derived from the audited consolidated financial statements of the
Company included in the Form 10-K for the year ended January 29, 1998.
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 Last In First Out
(LIFO) method of accounting for inventories. The excess of specific cost
inventory over LIFO valuation was $143.7 million at April 30, 1998, $133.8
million at May 1, 1997, and $139.1 million at January 29, 1998. 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 $65.0 million at
prevailing interest rates which expires on August 31, 2002. There was
$739,000 restricted for letters of credit at April 30, 1998. The line of
credit contains quarterly and annual financial covenants which require
minimum tangible net worth and various financial ratios. The Company has
complied with restrictions and limitations included in the provisions of
the line of credit.
5. During the first quarter of fiscal year 1999, the Company repurchased
105,000 shares of common stock from the Profit Sharing Plan at market
values totaling $3.4 million.
6. On March 4, 1998, the Company announced that it had signed a letter of
intent to acquire the operations of Western Drug Distributors, Inc., a
chain of twenty drug stores in Washington and Oregon. Closing is subject
to many factors, including the signing of a definitive agreement and the
satisfactory completion of due diligence by Longs Drug Stores.
7. Effective January 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual
financial statement. For example, other comprehensive earnings may include
foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities
classified as available-for-sale. Comprehensive income does not differ
from net income for the Company for the first quarters of fiscal years 1999
and 1998.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
First quarter total sales increased 5.9% to $752.8 million, with same store
sales growing 5.5% for the quarter. Increases in average prescription price and
an extended allergy season related to El Nino contributed to a 12.1% growth in
pharmacy sales. Mail Order operations are now part of RxAmerica, our joint
venture PBM with American Stores which started in November 1997. As a result,
mail order operations are no longer included in sales. Total sales and pharmacy
sales comparisons are impacted by $5.7 million of mail order sales included in
first quarter of fiscal year 1998 for which there are no comparable sales for
the current quarter. Non-pharmacy sales grew 4.0% due to strong sales in Hawaii
and solid performance especially in the Cosmetic and Photo segments.
Pharmacy represented 37.4% of total sales in first quarter, up from 36.1% in the
prior year. Pharmacy sales reimbursed through third party arrangements grew to
84.3% of total pharmacy sales compared to 81.5% in the same quarter last year.
GROSS MARGINS
Gross margin (including LIFO) was 26.8% for the quarter, up from 26.6% 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. The downward trend in pharmacy margins and an upward trend in
average script price is expected to continue throughout the fiscal year.
Improved buying, marketing programs and continued benefit of category
management improved non-pharmacy margins and more than offset the decline in
pharmacy margins.
The Company uses the Last-In First-Out (LIFO) method of inventory valuation.
The LIFO provision was $4.6 million for the quarter compared to $600,000 in the
prior year quarter, primarily due to higher inflation in pharmacy products.
Gross margin on a FIFO basis was 27.4% for the quarter, up from 26.6% a year
ago.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percent of sales were 23.7%, which is
an increase of 0.4% as a percent of sales but in line with plan. Salaries and
wage costs as a percent of sales were down compared to prior year. Advertising
expense was higher than Plan due to a shift from expense rebates to scanned
deductions in Cost of Goods Sold (COGS). Costs associated with Year 2000
remediation effort were $1.3 million for the quarter and 0.2% of the increase as
a percent of sales. Year 2000 remediation effort is on plan and the total
expense for the year is expected to be between $5-6 million.
OPERATING/NET INCOME
Operating income as a percent of sales for the quarter declined to 3.1% compared
to 3.3% in the prior year primarily due to higher operating and administrative
expenses including Year 2000 remediation effort. Net income as a percent of
sales declined slightly to 1.9% from 2.0% in the prior year quarter also
attributed to Year 2000 expenses incurred.
Diluted earnings per share for the quarter increased to $.37 per share compared
to $.36 per share in the prior year quarter reflecting slightly higher net
income and a decrease in the shares outstanding compared to last year.
-6-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash provided by operating activities increased by $20.0 million compared to
prior year primarily due to higher than expected first quarter sales and
margins, reductions in stores and warehouses inventories, and increases in
accounts payables.
Payments for property additions for the first quarter increased $8.5 million
compared to the prior year quarter due to the construction of a new warehouse,
new stores and major remodels, and MIS technology.
The number of stores in operation increased by thirteen from 339 to 352 since
first quarter last year. The Company expects to open between fourteen and
fifteen stores in the fiscal year 1999. Capital expenditures are expected to
increase this year primarily due to the completion of a new warehouse, new
stores, and information system enhancements.
At quarter end, the Company had no borrowings on a $65 million unsecured
revolving line of credit at prevailing interest rates.
Expenditures for capital projects, dividends and stock repurchases are expected
to continue to be funded from operations, cash reserves and borrowings as deemed
necessary.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements regarding the Company's
expected performance for future periods including sales growth, same store
sales, new store openings, and Year 2000 remediation expenditures. 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.
-7-
<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
April 30, 1998.
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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 June 15, 1998 /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)
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1999
<PERIOD-START> JAN-30-1998
<PERIOD-END> APR-30-1998
<CASH> 34,325
<SECURITIES> 0
<RECEIVABLES> 64,808
<ALLOWANCES> 0
<INVENTORY> 333,124
<CURRENT-ASSETS> 457,455
<PP&E> 763,607
<DEPRECIATION> 320,336
<TOTAL-ASSETS> 930,298
<CURRENT-LIABILITIES> 292,617
<BONDS> 0
0
0
<COMMON> 19,453
<OTHER-SE> 570,812
<TOTAL-LIABILITY-AND-EQUITY> 930,298
<SALES> 752,799
<TOTAL-REVENUES> 0
<CGS> 550,835
<TOTAL-COSTS> 729,509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 23,290
<INCOME-TAX> 9,100
<INCOME-CONTINUING> 14,190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,190
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
