<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended July 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 38,906,743 shares of common stock outstanding as of August 27, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
<TABLE>
<CAPTION>
For the For the Two
Quarters Ended Quarters Ended
JULY 30, July 31, JULY 30, July 31,
1998 1997 1998 1997
------------ ------------ -------------- ---------------
------------------------(Thousands Except Per Share)--------------------------
<S> <C> <C> <C> <C>
SALES $786,795 $718,267 $1,539,594 $1,429,200
COSTS AND EXPENSES:
Cost of merchandise sold 575,689 528,199 1,126,524 1,050,355
Operating and administrative 186,616 169,854 365,255 335,363
Net interest expense (income) (60) 50 (25) 138
--------- --------- ----------- ----------
INCOME BEFORE TAXES ON INCOME 24,550 20,164 47,840 43,344
TAXES ON INCOME 9,700 7,900 18,800 17,000
--------- --------- ----------- ----------
NET INCOME $ 14,850 $ 12,264 $ 29,040 $ 26,344
--------- --------- ---------- ----------
--------- --------- ---------- ----------
PER COMMON SHARE:
NET INCOME BASIC $ .39 $ .32 $ .75 $ .68
NET INCOME DILUTED $ .38 $ .31 $ .75 $ .68
DIVIDENDS $ .14 $ .14 $ .28 $ .28
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
BASIC 38,529 38,751 38,499 38,801
DILUTED 38,735 38,943 38,677 38,970
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 30, July 31, January 29,
1998 1997 1998
---------- ---------- ------------
----------------------(Thousands)----------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and equivalents $ 15,975 $ 16,228 $ 48,552
Pharmacy and other receivables 60,093 53,898 63,107
Merchandise inventories 338,846 345,447 345,082
Deferred income taxes 24,706 18,369 23,244
Other 1,250 811 1,337
---------- ---------- ----------
Total current assets 440,870 434,753 481,322
---------- ---------- ----------
PROPERTY:
Land 94,032 89,745 90,428
Buildings and leasehold improvements 378,528 347,644 361,635
Equipment and fixtures 309,370 279,497 287,675
Beverage licenses 7,513 7,340 7,468
---------- ---------- ----------
Total property--at cost 789,443 724,226 747,206
Less accumulated depreciation 329,052 302,231 312,112
---------- ---------- ----------
Property--net 460,391 421,995 435,094
---------- ---------- ----------
OTHER NON-CURRENT ASSETS 61,288 10,824 29,873
---------- ---------- ----------
TOTAL $962,549 $867,572 $946,289
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $167,929 $152,401 $170,855
Short-term borrowings 12,000 12,052 ----
Employee compensation and benefits 73,067 61,548 63,300
Taxes payable 30,115 18,926 46,079
Current portion of long-term debt and guarantee
of Profit Sharing Plan debt 4,193 3,251 3,210
Other 26,965 24,907 29,325
---------- ---------- ----------
Total current liabilities 314,269 273,085 312,769
---------- ---------- ----------
GUARANTEE OF PROFIT SHARING PLAN DEBT ---- 3,532 1,803
LONG-TERM DEBT 13,944 ---- 14,219
DEFERRED INCOME TAXES AND
OTHER LONG-TERM LIABILITIES 33,169 34,417 33,355
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock (38,907,000, 38,825,000,
and 38,629,000 shares outstanding) 19,453 19,412 19,315
Additional capital 118,195 114,714 110,466
Common stock contribution to Profit Sharing Plan ---- ---- 9,856
Guarantee of Profit Sharing Plan debt (3,533) (6,783) (4,371)
Retained earnings 467,052 429,195 448,877
---------- ---------- ----------
Total stockholders' equity 601,167 556,538 584,143
---------- ---------- ----------
TOTAL $962,549 $867,572 $946,289
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
For the Two Quarters Ended
JULY 30, July 31,
1998 1997
-------------------------------------
--------------(Thousands)------------
OPERATING ACTIVITIES:
<S> <C> <C>
Receipts from customers $ 1,543,637 $ 1,425,566
Payments for merchandise (1,123,214) (1,050,837)
Payments for operating and administrative expenses (338,871) (323,447)
Income tax payments (30,616) (18,719)
------------ ------------
Net cash provided by operating activities 50,936 32,563
------------ ------------
INVESTING ACTIVITIES:
Payments for property additions and other assets (81,814) (26,866)
Receipts from property dispositions 862 821
------------ ------------
Net cash used in investing activities (80,952) (26,045)
------------ ------------
FINANCING ACTIVITIES:
Repurchase of common stock ---- (9,816)
Dividend payments (10,883) (10,973)
Proceeds from short-term borrowings 12,000 12,052
Payments on long-term debt (260) ----
Proceeds from sale of common stock to Profit Sharing Plan (3,418) (4,387)
------------ ------------
Net cash used in financing activities (2,561) (13,124)
------------ ------------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (32,577) 6,606
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 48,552 22,834
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 15,975 $ 16,228
------------ ------------
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 29,040 $ 26,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,239 21,502
Deferred income taxes and other (1,648) (4,075)
Restricted stock awards 1,229 977
Common stock contribution to benefit plan 200 ----
Tax benefits credited to stockholders' equity 18 35
Changes in assets and liabilities:
Pharmacy and other receivables 3,014 (3,987)
Merchandise inventories 6,236 11,486
Other current assets 87 1,128
Current liabilities (11,479) (20,847)
------------ ------------
Net cash provided by operating activities $ 50,936 $ 32,563
------------ ------------
------------ ------------
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 29, 1998 and Two Quarters Ended July 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
CONTRIBUTIONS GUARANTEE
(Thousands) COMMON STOCK TO PROFIT OF PROFIT TOTAL
------------------ ADDITIONAL SHARING SHARING RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL PLAN PLAN DEBT EARNINGS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
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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 contributions 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)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 29, 1998 38,629 $19,315 $110,466 $9,856 ($4,371) $448,877 $584,143
- -----------------------------------------------------------------------------------------------------------------------------------
UNAUDITED:
Net income 29,040 29,040
Dividends ($.14 per share) (10,883) (10,883)
Profit Sharing Plan:
Issuance of stock for FY98 contributions 309 154 9,902 (9,856) 200
Purchase of stock from plan (105) (53) (3,365) (3,418)
Reduction of plan debt 838 838
Restricted stock awards, net 74 37 1,192 1,229
Tax benefits related to employee stock plans 18 18
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 30, 1998 38,907 $19,453 $118,195 $ 0-- ($3,533) $467,052 $601,167
- -----------------------------------------------------------------------------------------------------------------------------------
</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 July 30, 1998 and July 31, 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 $144.3 million at July 30, 1998, $135.7
million at July 31, 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
$53.0 million available for use and $6.2 million restricted for letters of
credit at July 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 two quarters of fiscal year 1998, the Company repurchased
171,000 shares of common stock from the Profit Sharing Plan at market
values totaling $4.4 million and 399,000 common shares from T.J. and V.M.
Long Charitable Foundations at market values totaling $9.8 million. 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. There were no repurchases of common stock during
the second quarter of fiscal year 1999.
6. 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 two quarters of fiscal years
1999 and 1998.
7. During July 1998, the Company completed its acquisition of Western Drug
Distributors, Inc. (Western). Western operated 20 Drug Emporium stores, 18
in Washington, mainly in the greater Seattle/Tacoma area, and 2 in the
Portland, Oregon area. The transaction was accounted for as a purchase
and results of operations for the former Western stores are included with
those of the Company since completion of the acquisition.
- 5 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Second quarter sales increased 9.5% to $786.8 million, with same store sales
growing 8.2% for the quarter. Year-to-date sales increased 7.7% to $1.54
billion. Increases in average prescription price and an extended allergy
season contributed to a 22.2% growth in pharmacy sales for the second quarter
and 17.0% year-to-date. Solid performance in core categories such as
over-the-counter drugs, cosmetics and photo/photo-processing contributed to a
4.9% growth in front-end sales for the second quarter and 4.5% year-to-date.
Pharmacy represented 37.5% of total sales in second quarter, up from 34.6% in
the prior year. Pharmacy sales reimbursed through third party arrangements grew
to 84.0% of total pharmacy sales compared to 82.2% in the prior year.
GROSS MARGINS
Gross margin (including LIFO) was 26.8% for the second quarter and 26.8%
year-to-date. Margins are up slightly from 26.5% in second quarter a year ago
and 26.5% year-to-date. Pharmacy margins continue to decline as claims
reimbursed by third party (managed care) plans 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
prescription price is expected to continue throughout the fiscal year. Improved
buying, increases in sales of higher margin categories, and the continued
benefit of category management increased 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 $600,000 for the second quarter compared to $1.9 million
in the prior year quarter. Year-to-date the LIFO provision was $5.2 million as
compared to $2.5 million for the same period last year. Increases in LIFO are
primarily due to higher inflation in pharmacy products. Gross margin on a FIFO
basis was 26.9% for the quarter, up 0.2% from the prior year.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for the second quarter are up slightly
over last year at 23.7%. Year-to-date operating and administrative expenses as a
percent of sales increased 0.2% from the prior year. Included in operating and
administrative expenses are costs for the Year 2000 remediation effort. The
effort is proceeding according to plan, with $800,000 expensed in the second
quarter and $2.1 million year-to-date, and is expected to be substantially
complete by the end of the year. The purchase of new remediation and testing
toolsets and the decision to bring the project management in house has reduced
the estimate of total expense for the fiscal year to between $4 and $5 million.
As a result, the remaining expense for the fiscal year is estimated between
$2 and $3 million.
OPERATING/NET INCOME
Operating income as a percent of sales for the second quarter increased to 3.1%
compared to 2.8% in the prior year due to increased sales, strong non-pharmacy
margins and control of expenses. Net income as a percent of sales increased to
1.9% from 1.7% in the prior year.
Net income for the two quarters increased 10.2% to $29.0 million. Earnings per
diluted share for the two quarters increased 10.3% to $.75 per share compared to
$.68 in the prior year.
- 6 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash provided by operating activities for the two quarters increased compared to
prior year primarily due to decreased investment in inventory and stronger sales
and margins. Pharmacy warehouse inventory decreased by $16.0 million and
average inventory per store decreased by $50 thousand compared to the prior
year.
Payments for property additions through the second quarter increased $55.0
million compared to prior year primarily due to the acquisition of 20 stores
from Western and the completion of a new warehouse.
The Company has opened five stores through the second quarter in addition to
the 20 stores acquired from Western. The Company expects to open a total of
ten stores and close four stores during the remainder of fiscal year 1999.
Capital expenditures are expected to increase approximately $45 million this
year primarily due to the investment in new stores and information system
enhancements.
At quarter end, there was $12.0 million outstanding on an unsecured revolving
line of credit at prevailing interest rates. The unused portion of the line of
credit was $53.0 million.
Expenditures for capital projects, dividends, and stock repurchases are expected
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 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.
- 7 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 19, 1998, the Annual Meeting of Shareholders of the
Company was held in Walnut Creek, California.
(b) The following directors were elected:
<TABLE>
<CAPTION>
Votes in Favor Votes Withheld
-------------- --------------
<S> <C> <C>
R. M. Long 35,058,616 722,745
R. A. Plomgren 35,097,039 684,322
H. R. Somerset 35,097,039 684,322
F. E. Trotter 35,097,039 684,322
</TABLE>
There were no abstentions and no broker non-votes.
(c) Other directors whose term of office as a director continued
after the Annual Meeting:
R. M. Brooks S. D. Roath
W. G. Combs G. H. Saito
D. G. DeSchane D. L. Sorby, Ph.D.
E. E. Johnston T. R. Sweeney
M. S. Metz
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter
ended July 30, 1998.
- 8 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LONGS DRUG STORES CORPORATION
-----------------------------------------
(REGISTRANT)
Date September 14, 1998 /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> 6-MOS
<FISCAL-YEAR-END> JAN-28-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-30-1998
<CASH> 15,975
<SECURITIES> 0
<RECEIVABLES> 60,093
<ALLOWANCES> 0
<INVENTORY> 338,846
<CURRENT-ASSETS> 440,870
<PP&E> 789,443
<DEPRECIATION> 329,052
<TOTAL-ASSETS> 962,549
<CURRENT-LIABILITIES> 314,269
<BONDS> 0
0
0
<COMMON> 19,453
<OTHER-SE> 581,714
<TOTAL-LIABILITY-AND-EQUITY> 962,549
<SALES> 1,539,594
<TOTAL-REVENUES> 0
<CGS> 1,126,524
<TOTAL-COSTS> 1,491,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 47,840
<INCOME-TAX> 18,800
<INCOME-CONTINUING> 29,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,040
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
