<PAGE>
ANNUAL REPORT 1998
LONGS DRUGS
THE
DESTINATION
DRUG STORE
[PICTURES]
<PAGE>
PROFILE Longs Drug Stores is one of the largest drug store chains in
North America, ending the year with 349 stores in California,
Hawaii, Nevada and Colorado. The Company offers a uniquely broad
assortment of merchandise -- including pharmaceutical products,
personal care items, photography supplies and greeting cards --
along with excellent value and a high degree of customer service.
Longs common stock is traded on the New York Stock Exchange under
the symbol LDG.
- --------------------------------------------------------------------------------
[MAP]
<TABLE>
<CAPTION>
Number of Stores at Fiscal Year End
<S> <C>
California 297
Hawaii 32
Nevada 12
Colorado 8
----------------
Total 349
<CAPTION>
Company-Owned Properties at Fiscal Year End
<S> <C>
Store Building and Land 124
Store Building on Leased Land 44
Corporate Offices 2
Warehouses 2
</TABLE>
<PAGE>
LONGS DRUGS STORES ANNUAL REPORT
FISCAL 1998
FINANCIAL HIGHLIGHTS
(MILLIONS EXCEPT SALES PER SQUARE FOOT, PER SHARE DATA AND NUMBER OF STORES)
<TABLE>
<CAPTION>
January 29, January 30, January 25,
Fiscal Year Ended 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $2,953 $2,828 $2,644
Net Income $ 58 $ 59 $ 46(1)
PER SHARE DATA (DILUTED)
Net Income $ 1.49 $ 1.50 $ 1.15(1)
Dividends $ .56 $ .56 $ .56
BALANCE SHEET DATA
Total Assets $ 946 $ 880 $ 854
Stockholders' Equity $ 584 $ 554 $ 523
KEY FINANCIAL RATIO
Return on Average Stockholders' Equity 10.2% 10.9% 8.8%(1)
STORE DATA
Number of Stores at Year End 349 337 328
Selling Square Footage at Year End 5.5 5.4 5.2
Sales Per Selling Square Foot (52-week basis) $ 537 $ 518 $ 505
</TABLE>
SALES NET INCOME EARNINGS PER SHARE (Diluted)
$ in billions $ in millions
[GRAPH] [GRAPH] [GRAPH]
(1) Includes $14 million lawsuit settlement in FY 1996 which reduced after tax
net income by $8.4 million, or $.21 per share.
1
<PAGE>
DESTINATION
[PICTURES]
- --------------------------------------------------------------------------------
S.D. ROATH, PRESIDENT TO OUR STOCKHOLDERS R.M. LONG, CHIEF EXECUTIVE OFFICER
- --------------------------------------------------------------------------------
Fiscal 1998 brought Longs continued success. We took important steps to bolster
the competitiveness and profitability of our core categories, improved operating
margins and efficiencies at all levels of our organization, and continued to
expand our presence in new and existing markets in the West. In fact, we
recently announced that Longs has signed a letter of intent to purchase Western
Drug Distributors, which operates as Drug Emporium N.W., a well known and well
placed 20-store retail chain in Washington and Oregon. We are optimistic that
these stores will provide opportunity for growth in the Northwest.
This potential acquisition underscores one of Longs' key strengths: our focus
on Western markets. We have consciously chosen to focus our resources on the
high opportunity markets of California, Hawaii, Nevada, and Colorado. When we
expand, we do so into adjacent operating markets that allow us to leverage the
equity of the Longs name and brand. The potential purchase of Western Drug
Distributors, subject to "due diligence", illustrates this strategy to extend
Longs' operating area while maintaining our long-standing focus on the Western
markets we know so well.
SOLID FINANCIAL RESULTS
Despite having one less week of operation than last year, Longs sales rose 4.4%
in fiscal 1998 to $2.95 billion. On a comparable 52-week basis, sales were up
6.4% with same store sales up 4.6%. Net income was $57.7 million, or $1.49 per
share, down slightly from $58.6 million, or $1.50 per share, a year ago. These
earnings were in line with our expectations and reflect both the one less week
of operation in fiscal 1998 and expenses in upgrading our computer systems to be
"Year 2000" compliant. This is an important issue for all retailers, and Longs
is moving aggressively to ensure that we and our vendor partners make a seamless
transition into the new century. We expect to spend approximately $5-$6 million
more to finalize this effort, with the majority of additional expense in the
current fiscal year.
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
[PICTURES]
(CLOCKWISE FROM TOP LEFT)
Ron Lovelady, Senior Vice President, Human Resources
Terry Burnside, Senior Vice President, Marketing
Dan Wilson, Senior Vice President, Northern Region Manager
Brian Kilcourse, Senior Vice President, Chief Information Officer
[PICTURES]
(FROM TOP)
Clay Selland, Vice President and Treasurer
Mike Deimling, Director of Category Managers
2
<PAGE>
THE BEST DRUG STORE IN TOWN
Fiscal 1998 was a successful year at Longs because we continued to prove our six
decade commitment to being the "best drug store in town". This is far more than
a slogan; it is our daily operating goal. Every Longs store is an integral part
of its surrounding community and the daily life of its neighbors and customers.
We've been successful at this approach because we do things a little
differently. We give our store managers a good deal of autonomy to merchandise
their stores and stock different items that suit the unique needs of their
customers. We stress personal service -- everything from getting to know our
regular customers to always being available to answer questions -- and no one in
our business has cleaner, more orderly or easier to shop stores.
Longs also pioneered the diverse product selection found in modern drug
stores. We offer everything from prescription and over-the-counter drugs to
greeting cards to cosmetics to photo supplies to wine and food basics. In recent
years we have taken this innovative approach a step further with category
management tools that ensure the merchandise on our shelves accurately reflects
customer needs and that our stores have an optimal product mix for margin and
profitability. Category management has helped drive sales throughout our stores,
especially in the over-the-counter drugs, cosmetics, and toiletries categories.
It is worth noting that such catalysts to store traffic are important
elements to Longs' continued profit growth. We have squeezed a lot of
inefficiency and expense out of our store operations in the past few years.
Going forward, non-pharmacy margin growth is likely to be modest. While we'll
always be looking for new ways to reduce our cost structure -- though never by
diminishing our high service levels -- sales growth will be the primary engine
for non-pharmacy profit growth in the foreseeable future.
[PICTURES]
(CLOCKWISE FROM TOP LEFT)
Randy Vipond, District Manager
Bruno Amedore, District Manager
Brad McTeer, District Manager
Allan Torres, District Manager
Several members of Longs' management team assumed increased responsibilities
during fiscal 1998.
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
3
<PAGE>
PHARMACY: SETTING THE INDUSTRY STANDARD
Growing sales will also drive our pharmacy profitability. We have taken several
steps to offset declines in third party pharmacy margins, and we have begun to
see evidence that this industry-wide issue may be waning. For example, we have
implemented a series of work flow and technological initiatives that are helping
to reduce our cost structure while improving service. Additional efforts to
improve pharmacy sales and profitability include the November 1997 merger of our
pharmacy benefits management (PBM) subsidiary, Integrated Health Concepts (IHC),
with the PBM of American Stores Corporation, called RxAmerica.
Operating under the name RxAmerica, this new and much larger PBM is a 50/50
joint venture between Longs and American Stores. It will serve approximately 400
HMO and insurance provider clients that manage more than 3 million lives.
RxAmerica markedly increases the geographic reach of Longs' PBM services. It
also improves our ability to take advantage of emerging demographic trends. For
example, Longs stores average among the industry leaders in prescriptions per
day. This volume, coupled with our expanded PBM presence positions us strongly
in a market characterized by an aging population that needs more prescriptions
- -- especially as prescription therapy becomes a larger part of modern health
care.
FISCAL 1998
ACCOMPLISHMENTS
1 On a comparable 52-week basis, sales were up 6.4% with same store sales up
4.6% in fiscal 1998.
2 The patient care initiatives that we began with Integrated Health Concepts,
our pharmacy benefits management (PBM) subsidiary were combined with the
mail order and processing capabilities of RxAmerica - the PBM from American
Stores Company.
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
4
<PAGE>
In addition to helping fuel pharmacy sales growth, RxAmerica offers us an
opportunity to continue the kind of innovation that has always marked our third
party pharmacy provider relationships. Longs' focus has always been on patient
care initiatives, and the merger with RxAmerica should allow us to continue to
enhance the delivery of patient care, improve wellness and reduce healthcare
outcome costs for both providers and patients. The combined PBM will also
provide operating efficiencies that Longs had previously outsourced. These
include better claims processing, formulary management, and compliance
administration -- to strengthen our overall pharmacy performance. In short,
RxAmerica is a solution typical of Longs: better service and customer benefits,
with projected financial advantages to the Company.
Also in fiscal 1998, we reported on Longs' leadership in a comprehensive
study of pharmaceutical industry supply chain efficiency. In addition to Longs,
three large pharmaceutical firms and three leading wholesalers participated in
the study, which tested innovative new methods of product demand forecasting.
Results were very encouraging, demonstrating the potential for significant
reductions in store and distribution center inventories. Indeed, we have already
implemented some key findings from the study and have significantly reduced
pharmacy inventory levels in our pharmacy distribution warehouse and the first
32 stores in which we have rolled out the program.
3 Longs opened a total of 14 new stores in fiscal 1998, including our first
in metropolitan Denver and our second and third stores in Las Vegas. Two
more Las Vegas area stores will open early in fiscal 1999.
4 Longs' pharmaceutical supply chain efficiency study has yielded encouraging
results in reducing inventory and maintaining excellent service levels in
our warehouse and test stores.
5 We signed a letter of intent to acquire a 20-store retail drug chain
located in Washington and Oregon expanding our presence in the West.
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
5
<PAGE>
[LOGO]
A LEADER IN OUR MARKETS
Longs ended fiscal 1998 with 349 stores in California, Hawaii, Nevada and
Colorado. Again, our strategy has been to add stores in or near existing
operating areas, and in fiscal 1998 we opened a total of 14 new stores.
Remaining a dominant retailer in our markets is one reason we strengthen our
presence in current markets as opportunity warrants. Customer convenience is
another -- it's all part of being the best drug store in town.
Recently we have focused a growing percentage of new store resources in
Nevada and Colorado, including our first in metropolitan Denver, and two in
Nevada. We are especially focused on the opportunity in the Las Vegas area,
where we now have five stores. Fiscal 1998 was our first full year in Las Vegas
and we are pleased with our progress. We are working hard to establish the kind
of presence and reputation in Las Vegas that Longs enjoys in all its other
markets. When our acquisition of Western Drug Distributors is completed, we will
bring that same focus to our new markets in the Pacific Northwest.
SIXTY YEARS YOUNG
As the Company enters its 60th year of operation, we are optimistic about Longs'
future. In a consolidating industry, we have strength in key western markets
equal or superior to any national competitor that operates in our region. We
have made significant investments in technology that have improved our operating
efficiency and customer service and prepared a solid plan to deal with Year 2000
computer systems issues.
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
6
<PAGE>
BEING THE "BEST DRUG STORE IN TOWN" IS FAR MORE THAN A SLOGAN; IT IS OUR DAILY
OPERATING GOAL.
We also have an extremely strong group of managers who are steadily stepping
into senior positions of responsibility. In recent months we announced the
retirement of three Longs executive veterans: George Duey, Don England, and Jack
Daleth. Between them, these three men opened more than one hundred stores -- in
many cases personally -- and helped guide Longs growth from a neighborhood drug
retailer into a strong regional chain. While their insight and experience will
be greatly missed, we have a new generation of leaders who will continue to
carry Longs forward to still greater accomplishments. Among the senior managers
now taking on increased responsibility are Ron Lovelady, senior vice president,
human resources; Terry Burnside, senior vice president, marketing; and Brian
Kilcourse, senior vice president and chief information officer.
Finally, our confidence rests on the strong foundation of 17,300 Longs
employees who take a smile, pride in their work, and a commitment to their
customers and to their jobs every day. They are the most important element that
makes Longs the best drug store in town, and we thank them all for all their
efforts.
/s/ Steve Roath /s/ Bob Long
- --------------------------------------------------------------------------------
S.D. ROATH, PRESIDENT APRIL 7, 1998 R.M. LONG, CHIEF EXECUTIVE OFFICER
- --------------------------------------------------------------------------------
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
7
<PAGE>
PHARMACY Longs pharmacies are a unique blend of people-driven customer service
and technology-driven efficiency. Computer-aided prescription filling and
inventory replenishment have reduced costs, but the most important benefit they
provide is time. Because our pharmacists spend less time on routine tasks, they
have more time to spend answering customer questions. It's so old fashioned,
it's revolutionary, and it's a major reason why our customers know Longs as the
"best drug store in town".
[PICTURES]
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
8
<PAGE>
OVER-THE-COUNTER MEDICATIONS Our pharmacists' commitment to customer service
doesn't stop at the dispensing counter. Take a look on your next trip to Longs
and you'll see these trusted professionals available to help customers make
informed choices in over-the-counter medications. This kind of assistance --
coupled with the large selection of some over-the-counter medication products
we offer -- gives customers the confidence that they can and will find the
product they need every time they visit Longs.
[PICTURES]
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
9
<PAGE>
GREETING CARDS By definition, greeting cards are a personal expression, and
Longs store managers often customize their product choice to match local
demographics and preferences. The common thread at all our stores, however, is a
greeting card department that always offers the highest quality and superior
selection. Our primary card line chainwide is Hallmark, and each store has at
least 100 linear feet of display. Many stores also offer party supplies and
related merchandise to give customers a "one-shop-stop" for any event or
holiday.
[PICTURES]
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
10
<PAGE>
LONGS BRAND Longs' assortment of private-label merchandise is among the broadest
in our industry. In over-the-counter medications, toiletries and even some food
items, we offer more than 1200 Longs brand products for our customers who want
excellent value and excellent quality. Private-label products are a significant
part of our product mix and an important contributor to our strong brand equity.
That's why we adhere to the highest standards in all our private-label
merchandise.
[PICTURES]
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
11
<PAGE>
DESTINATION
GROCERY Other drug stores sell food and beverages, but few do it with Longs'
commitment and understanding of what today's busy shoppers need. Every Longs
carries key top selling grocery staples, and we also stock a selection of wines,
beer, bottled water, and dairy products. Importantly, we stay well-stocked in
these categories. At Longs, groceries are a staple, something our customers can
count on every day.
[PICTURES]
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
12
<PAGE>
PHOTO The photo department at Longs sits at the front of the store, and with
good reason; we have a lot to offer. In addition to high quality processing --
including one hour labs in many locations -- and a full selection of film, we
have items you won't find in other drug stores, including higher quality
cameras. And many stores carry frames, albums, and selected dark room supplies
to meet the needs of even the most avid shutter bug.
[PICTURES]
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
13
<PAGE>
DESTINATION
SPECIALTY ITEMS No one knows the customer as well as the store staff who are on
the sales floor everyday. That's why we give our store management the autonomy
and flexibility to stock a wide array of specialty items that they believe their
customers want. From sporting goods to model trains to rubber stamps to
porcelain figurines, every Longs store has something unique. It's just one of
the many ways we remind our customers that we are listening. That's what people
expect from the best drug store in town.
[PICTURES]
PHOTO/PHOTO PROCESSING
[PICTURE]
PHARMACY
[PICTURE]
OTC MEDICATIONS
[PICTURE]
SPECIALTY ITEMS
[PICTURE]
14
<PAGE>
COSMETICS At Longs, we believe personal care products deserve personalized
customer service. While we offer an especially large selection of quality brand
name cosmetics and skin and hair care products -- all at excellent everyday
values -- what really sets Longs apart are our pink-coated beauty consultants.
Highly trained and knowledgeable, these advisors offer service beyond that
expected in a drug store, and build the kind of customer loyalty that makes
Longs a destination for a wide array of product needs.
[PICTURES]
COSMETICS
[PICTURE]
GROCERY
[PICTURE]
LONGS BRAND
[PICTURE]
GREETING CARDS
[PICTURE]
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
SEASONAL BUSINESS AND 52/53 WEEK YEARS
The retail drug store business is seasonal, peaking in the fourth quarter due
to the Thanksgiving and Christmas holidays and the winter cold and flu season.
The Company's fiscal year ends the last Thursday in January. Most fiscal years
have four quarters of thirteen weeks each, totaling 52 weeks. Every five to six
years the fourth quarter has one additional week of operations which was the
case with fiscal 1997. Sales below include actuals and a 52-week comparison.
SALES
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- -------------------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Sales $ 2,952,921 $ 2,828,338 $ 2,644,376
Total Sales Growth 4.4% 7.0% 3.4%
- -------------------------------------------------------------------------------
Sales -- 52 Week Basis $ 2,952,921 $ 2,775,094 $ 2,644,376
- -------------------------------------------------------------------------------
Same Store Sales Growth 4.6% 4.1% 0.7%
New Stores / Closed Stores 1.8% 0.8% 2.7%
- -------------------------------------------------------------------------------
Total Sales Growth--52 Week Basis 6.4% 4.9% 3.4%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
New Stores 14 10 15
Closed Stores (2) (1) (4)
- -------------------------------------------------------------------------------
Number of Stores 349 337 328
- -------------------------------------------------------------------------------
</TABLE>
The steady improvement in same store sales was due to strong pharmacy sales and
successful category management and other marketing initiatives in non-pharmacy
categories. Strong increases in the major categories of over-the-counter drugs,
cosmetics, and toiletries contributed to sales growth.
PHARMACY SALES
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- ---------------------------------------------------------------------------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pharmacy as a Percent of Total Sales 34.1% 33.1% 32.0%
Third Party Sales as a Percent of
Pharmacy Sales 82.1% 80.2% 76.5%
- ---------------------------------------------------------------------------------------
</TABLE>
Pharmacy sales grew slightly as a percentage of total sales as a result of
strong pharmacy sales growth. Pharmacy sales increased 11.0% in fiscal 1998 on a
52-week comparable basis, 9.0% in fiscal 1997 on a 52-week comparable basis, and
10.7% in fiscal 1996. Pharmacy sales reimbursed through managed care
arrangements (third party sales) was 82% and continues to increase as a percent
of pharmacy sales but at a lesser rate than prior years.
GROSS MARGIN
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- -------------------------------------------------------------------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Margin as a Percent of Sales 26.6% 26.7% 26.4%
- -------------------------------------------------------------------------------
</TABLE>
Fiscal 1998 gross margin was basically flat with improved buying and the
benefits of category management and promotional strategies offsetting declines
in third party pharmacy margin.
The Company uses the LIFO (last-in first-out) method of accounting for its
inventories. The LIFO provision was $5.9 million in fiscal 1998 compared to
$3.4 million and $4.8 million in the preceding two years. The LIFO provision
fluctuates with inflation rates and year-end inventory mix, and is included
in cost of merchandise sold.
OPERATING AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- --------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Operating and Administrative
Expenses $690,552 $657,796 $608,614
Operating and Administrative
Expenses as a Percent of Sales 23.4% 23.3% 23.0%
- --------------------------------------------------------------------
</TABLE>
Operating and administrative expenses as a percent of sales increased 0.1% in
fiscal 1998 and 0.3% in fiscal 1997. Costs associated with the Year 2000 Project
impacted fiscal year 1998 expenses ($1.3 million). Without such costs, operating
and administrative expenses as a percent of sales would have been flat compared
to fiscal 1997.
YEAR 2000 EXPENSE
The Company is in the process of updating its software systems
and applications to be Year 2000 compliant. The majority of testing and
conversion of system applications is expected to be completed by early 1999.
In addition, the Company has communicated with all of its significant suppliers
and large vendors to determine their Year 2000 compliance readiness. There can
be no guarantee that the systems of other companies will be converted on a
timely basis, or that failure to convert by another company, or a conversion
that is incompatible with the Company's systems will not have an adverse effect
on the Company.
The Company expensed $1.3 million during fiscal 1998 and estimates expenses
to complete this effort will be between $5 and $6 million, which includes
both internal and external personnel.
LAWSUIT SETTLEMENT
In fiscal 1996 the Company had a one-time $14.0 million pre-tax charge to
operations to settle a lawsuit. The after tax impact of the settlement was $8.4
million or $0.21 per share. Operating comparisons to fiscal 1996 are made with
and without the settlement to facilitate analysis. The details of the settlement
are discussed in the footnotes to the financial statements.
NET INTEREST (INCOME) EXPENSE
Long term debt and available cash balances resulted in net interest expense of
$600 thousand for fiscal 1998 compared to net interest income in prior years.
INCOME TAXES
The Company's effective income tax rates were 39.3% in fiscal 1998, 39.9% in
fiscal 1997, and 39.8% in fiscal 1996. Tax rates declined due to reduced
California state taxes. It is anticipated that the Company's effective tax rate
will be approximately 39.6% for fiscal 1999.
16 LONGS DRUGS STORES ANNUAL REPORT 1998
<PAGE>
NET INCOME
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- --------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 57,726 $ 58,612 $ 46,228
Net Income as a Percent of Sales 2.0% 2.1% 1.7%
- --------------------------------------------------------------------
Net Income excluding impact of
lawsuit settlement in 1996 $ 57,726 $ 58,612 $ 54,651
Net Income as a Percent of Sales 2.0% 2.1% 2.1%
- --------------------------------------------------------------------
</TABLE>
Net income as a percent of sales decreased slightly versus fiscal 1997. Improved
gross margins were offset by increased operating and administrative expenses due
to Year 2000 costs and interest expense on short term bank borrowings in fiscal
1998 compared to interest income in fiscal 1997 and 1996.
EARNINGS PER SHARE (DILUTED)
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- --------------------------------------------------------------------------------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings per share $ 1.49 $ 1.50 $ 1.15
Percent change -0.7% 30.4% -2.5%
- --------------------------------------------------------------------------------------------
Earnings per share, excluding impact
of lawsuit settlement in 1996 $ 1.49 $1.50 $1.36
Percent change -0.7% 10.3% 15.3%
- --------------------------------------------------------------------------------------------
</TABLE>
In addition to the items affecting fiscal 1998 described in net income above,
earnings per share was impacted by stock repurchases in each of the last three
fiscal years.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 specifying revised EPS computations
for fiscal 1998 and all prior periods. The changes required by this statement
do not materially affect the Company's earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- ---------------------------------------------------------------
THOUSANDS
- ---------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents at
Fiscal Year End $48,552 $22,834 $49,314
- ---------------------------------------------------------------
</TABLE>
Cash and cash equivalents in fiscal 1998 increased due to sales growth and
decreased inventories primarily in the warehouses. Cash and cash equivalents in
fiscal 1997 were lower than fiscal 1996 due to increased inventories, the
construction of the Southern California warehouse and the cash payment of the
lawsuit settlement.
CASH FROM OPERATIONS
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- ------------------------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by Operating Activities $135,620 $80,579 $94,299
- ------------------------------------------------------------------------------------
</TABLE>
The increase in cash provided by operations in fiscal 1998 is primarily due to
higher customer receipts driven by sales growth and reduction in inventories.
Fiscal 1997 decrease in cash provided by operations was primarily due to the
payment of the lawsuit settlement and payment of 1996 taxes.
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- ---------------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash used in Investing Activities ($67,507) ($65,117) ($46,093)
- ---------------------------------------------------------------------------
</TABLE>
Capital expenditures increased in fiscal 1998 primarily due to an increased
investment in new stores and the completion of the Southern California
warehouse.
Capital expenditures for fiscal 1999 are expected to be between $70-$75
million with additional new stores, fixture upgrades in existing stores due
to category management initiatives, and the completion of a warehouse in
Northern California. Not included in this estimate is the proposed
acquisition of twenty drug stores in the Northwest, as described in the
Subsequent Event note to the financial statements.
During fiscal 1997 the Company opened its first store in the Las Vegas
market. The Company acquired three additional stores, two of which opened
early in fiscal 1998, from existing operators in Las Vegas.
In fiscal 1996, the Company purchased the inventory and fixed assets of six
stores and the merchandise inventories of additional stores in Hawaii from
PayLess Drug Stores Northwest, Inc.
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- ----------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Cash used in Financing Activities (42,395) (41,942) (56,410)
- ----------------------------------------------------------------------
</TABLE>
The primary reason for fluctuations in financing activities was due to stock
repurchases of $20.5 million in fiscal 1998, $21.9 million in fiscal 1997, and
$35.7 million in fiscal 1996. Stock repurchases are at the discretion of the
Board of Directors and are impacted by stock price and available cashflow.
The Company's principal bank credit agreement is a $65 million revolving
credit agreement, which expires on August 31, 2002. There was $5.1 million
restricted for letters of credit at the end of fiscal 1998.
Expenditures for capital projects, dividends, and stock repurchases have
been, and are expected to continue to be, funded from operations and cash
reserves. To maintain desired working capital, the Company may periodically
use short-term lines of credit.
SUBSEQUENT EVENT
On March 4, 1998 the Company announced that it had signed a letter of intent to
acquire the operations of Western Drug Distributors, Inc., which operates as
Drug Emporium N.W., 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 the Company.
LONGS DRUGS STORES ANNUAL REPORT 1998 17
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
January 29, January 30, January 25,
For the Fiscal Years Ended 1998 1997 1996
- ---------------------------------------------------------------------------------------------
THOUSANDS EXCEPT PER SHARE (52 WEEKS) (53 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES: $2,952,921 $ 2,828,338 $ 2,644,376
COST AND EXPENSES:
Cost of merchandise sold 2,166,744 2,074,084 1,946,391
Operating and administrative 690,552 657,796 608,614
Lawsuit settlement 14,000
Net interest (income) expense 599 (1,054) (1,457)
---------------------------------------
INCOME BEFORE TAXES ON INCOME 95,026 97,512 76,828
TAXES ON INCOME 37,300 38,900 30,600
---------------------------------------
NET INCOME $ 57,726 $ 58,612 $ 46,228
---------------------------------------
---------------------------------------
PER COMMON SHARE:
NET INCOME:
BASIC $ 1.50 $ 1.50 $ 1.16
DILUTED $ 1.49 $ 1.50 $ 1.15
DIVIDENDS $ .56 $ .56 $ .56
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
BASIC 38,590 38,987 40,019
DILUTED 38,764 39,141 40,163
</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 29, 1998 and January 30,
1997, 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 29, 1998. 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 Company at January 29, 1998
and January 30, 1997, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended January 29, 1998
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 6, 1998
18 LONGS DRUGS STORES ANNUAL REPORT 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 29, January 30,
For the Fiscal Years Ended 1998 1997
- ----------------------------------------------------------------------------------------------
THOUSANDS
- ----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 48,552 $ 22,834
Pharmacy and other receivables 63,107 49,911
Merchandise inventories 345,082 356,933
Deferred income taxes 23,244 19,757
Other 1,337 1,939
----------------------
Total current assets 481,322 451,374
PROPERTY:
Land 90,428 88,269
Buildings and leasehold improvements 361,635 337,486
Equipment and fixtures 287,675 270,337
Beverage licenses 7,468 7,240
----------------------
Total property at cost 747,206 703,332
Less accumulated depreciation 312,112 285,943
----------------------
Property net 435,094 417,389
OTHER NON-CURRENT ASSETS 29,873 10,886
----------------------
TOTAL $ 946,289 $ 879,649
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 170,855 $ 164,369
Employee compensation and benefits 63,300 55,957
Taxes payable 46,079 34,294
Current portion of long term debt and guarantee of Profit Sharing
Plan debt 3,210 2,363
Other 29,325 24,834
----------------------
Total current liabilities 312,769 281,817
----------------------
GUARANTEE OF PROFIT SHARING PLAN DEBT 1,803 5,192
----------------------
LONG TERM DEBT 14,219
----------------------
DEFERRED INCOME TAXES AND OTHER LONG TERM LIABILITIES 33,355 39,054
----------------------
STOCKHOLDERS' EQUITY:
Common stock (38,629,000 and 38,968,000 shares outstanding) 19,315 19,484
Additional capital 110,466 109,327
Common stock contribution to Profit Sharing Plan 9,856 9,955
Guarantee of Profit Sharing Plan debt (4,371) (7,555)
Retained earnings 448,877 422,375
----------------------
Total stockholders' equity 584,143 553,586
----------------------
TOTAL $ 946,289 $ 879,649
----------------------
----------------------
</TABLE>
See notes to consolidated financial statements.
LONGS DRUGS STORES ANNUAL REPORT 1998 19
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
January 29, January 30, January 25,
For the Fiscal Years Ended 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
THOUSANDS (52 WEEKS) (53 WEEKS) (52 WEEKS)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $ 2,940,035 $ 2,832,563 $ 2,645,211
Payments for merchandise (2,149,632) (2,098,579) (1,968,353)
Payments for operating and administrative expenses (618,480) (607,127) (551,179)
Income tax payments (36,303) (46,278) (31,380)
-----------------------------------------
Net cash provided by operating activities 135,620 80,579 94,299
-----------------------------------------
INVESTING ACTIVITIES:
Payments for property additions and other assets (78,007) (70,023) (49,174)
Receipts from property dispositions 10,500 4,906 3,081
-----------------------------------------
Net cash used in investing activities (67,507) (65,117) (46,093)
-----------------------------------------
FINANCING ACTIVITIES:
Principal payments on long term borrowings (60)
Proceeds from sale of common stock to Profit Sharing Plan 2,000 2,017
Repurchase of common stock (20,527) (21,888) (35,730)
Dividend payments (21,808) (22,054) (22,697)
-----------------------------------------
Net cash used in financing activities (42,395) (41,942) (56,410)
-----------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 25,718 (26,480) (8,204)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 22,834 49,314 57,518
-----------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 48,552 $ 22,834 $ 49,314
-----------------------------------------
-----------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 57,726 $ 58,612 $ 46,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 45,243 43,873 40,356
Deferred income taxes and other (9,186) 4,468 (5,060)
Restricted stock awards 2,065 1,669 1,478
Common stock contribution to benefit plans 9,856 9,460 4,550
Tax benefits credited to stockholders' equity 61 90 127
Changes in assets and liabilities:
Pharmacy and other receivables (13,196) 4,477 (484)
Merchandise inventories 10,625 (40,436) (21,151)
Other current assets 602 748 47
Current liabilities 31,824 (2,382) 28,208
-----------------------------------------
Net cash provided by operating activities $ 135,620 $ 80,579 $ 94,299
-----------------------------------------
-----------------------------------------
Non-cash investing and financing activities:
Issuance of note payable for investment in RxAmerica $ 13,201
Issuance of inventory and other assets for investment in RxAmerica $ 1,643
Issuance of note payable for payment of equipment $ 1,720
</TABLE>
See notes to consolidated financial statements
20 LONGS DRUGS STORES ANNUAL REPORT 1998
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Guarantee
Contribution 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 26, 1995 41,120 $ 20,560 $ 107,216 $ 5,515 ($13,181) $403,988 $524,098
--------------------------------------------------------------------------------------
Net income 46,228 46,228
Dividends ($.56 per share) (22,697) (22,697)
Profit Sharing Plan:
Issuance of stock for FY95
contribution 352 176 5,427 (5,515) (88) 0
Stock portion of FY96 contribution 4,550 4,550
Sale of stock to plan 118 59 1,988 (30) 2,017
Purchase of stock from plan (228) (114) (4,037) 58 (4,093)
Reduction of plan debt 2,696 2,696
Restricted stock awards, net 60 30 1,463 (15) 1,478
Tax benefits related to employee
stock plans 127 127
Repurchase of common stock (1,790) (895) (4,449) (26,293) (31,637)
--------------------------------------------------------------------------------------
BALANCE AT JANUARY 25, 1996 39,632 19,816 107,608 4,550 (10,485) 401,278 522,767
--------------------------------------------------------------------------------------
Net income 58,612 58,612
Dividends ($.56 per share) (22,054) (22,054)
Profit Sharing Plan:
Issuance of stock for FY96
contribution 181 91 4,010 (4,055) (46) 0
Contribution in cash (495) (495)
Stock portion of FY97 contribution 9,955 9,955
Sale of stock to plan 90 45 1,978 (23) 2,000
Purchase of stock from plan (179) (90) (3,925) 45 (3,970)
Reduction of plan debt 2,930 2,930
Restricted stock awards, net 72 36 1,651 (18) 1,669
Tax benefits related to employee
stock plans 90 90
Repurchase of common stock (828) (414) (1,995) (15,509) (17,918)
--------------------------------------------------------------------------------------
BALANCE AT JANUARY 30, 1997 38,968 19,484 109,327 9,955 (7,555) 422,375 553,586
--------------------------------------------------------------------------------------
Net income 57,726 57,726
Dividends ($.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)
--------------------------------------------------------------------------------------
BALANCE AT JANUARY 29, 1998 38,629 $ 19,315 $ 110,466 $ 9,856 $ (4,371) $448,877 $584,143
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
LONGS DRUGS STORES ANNUAL REPORT 1998 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
THE CONSOLIDATED FINANCIAL STATEMENTS include Longs Drug Stores Corporation
and its wholly-owned subsidiary, Longs Drug Stores California, Inc. All
inter-company accounts and transactions have been eliminated.
FISCAL YEARS end the last Thursday of January. Most fiscal years have four
quarters of thirteen weeks each, totaling 52 weeks. Every five to six years
the fourth quarter has an additional week which was the case with fiscal year
1997. References made to the 1998, 1997 and 1996 fiscal years refer to the
52-week period ended January 29, 1998, the 53-week period ended January 30,
1997, and the 52-week period ended January 25, 1996.
Reclassifications have been made to certain fiscal year 1997 and 1996 amounts
to make them comparable to the current year presentation.
NATURE OF OPERATIONS -- The company operates retail drug stores in
California, Hawaii, Colorado and Nevada with a majority of the sales
concentrated in California. Prescription drugs, over-the-counter health care
products, photo and photo processing, cosmetics and greeting cards are the
core merchandise categories. Additional significant categories include food,
toiletries and seasonal merchandise. Items sold through promotional
advertising represent a significant portion of sales.
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 may differ from those estimates.
CASH AND EQUIVALENTS include investments with original maturities of three
months or less that are easily convertible to cash.
MERCHANDISE INVENTORIES are valued using the last-in, first-out (LIFO)
method. The excess of specific cost over LIFO values was $139.1 and $133.2
million at the 1998 and 1997 fiscal 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 and beverage licenses. Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized.
The Company reviews long-lived assets for impairments, using its best
estimates based on reasonable and supportable assumptions and projections, to
ensure their current value can be recovered by the cash flows from future
operations.
OTHER NON-CURRENT ASSETS consist of an investment in the RxAmerica joint
venture accounted for under the equity method, purchased pharmacy customer
files and goodwill. Amortization of pharmacy customer files and goodwill are
calculated under a straight line method over estimated useful lives of one to
five and five to fifteen years, respectively.
NEW STORE OPENING COSTS, primarily labor to stock shelves, pre-opening
advertising and store supplies, are charged to expense as incurred.
ADVERTISING -- Advertising costs are expensed as incurred and were $21.6,
$22.5, and $21.9 million for fiscal years 1998, 1997, and 1996.
INCOME TAXES --The Company accounts for its taxes in accordance with SFAS No.
109 which requires the use of the asset and 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 adopted the disclosure requirements
of SFAS No. 123 (Accounting for Stock Based Compensation) in fiscal year
1996. The Company's only stock-based compensation is restricted stock which
is valued at its fair market value at the date of grant, and recorded as
compensation expense over the vesting period. As a result, there are no
additional required disclosures.
NET INCOME PER SHARE -- In the fourth quarter of fiscal year 1998, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"), which superseded APB Opinion No.
15. Under SFAS No. 128, the Company has restated net income per share for all
periods presented by providing dual presentation of EPS on a basic and
diluted basis. The Company's granting of restricted stock awards resulted in
potential dilution of basic EPS. The number of incremental shares from the
assumed issuance of restricted stock is calculated applying the treasury
stock method.
The following is a reconciliation of the number of shares (denominator) used
in the Company's basic and diluted net income per share computations (shares
in thousands):
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996
- ------------------------------------------------------------------------------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- ------------------------------------------------------------------------------------------
Shares Per Share Shares Per Share Shares Per Share
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 38,590 $1.50 38,987 $1.50 40,019 $1.16
- ------------------------------------------------------------------------------------------
Effect of Dilutive
Restricted
Stock Awards 174 (.01) 154 144 (.01)
- ------------------------------------------------------------------------------------------
Diluted EPS 38,764 $1.49 39,141 $1.50 40,163 $1.15
- ------------------------------------------------------------------------------------------
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS -- 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 non-owner sources; and
Statement of Financial Accounting Standard 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 any effect will be limited
to the form and content of its disclosures. Both statements are effective for
fiscal year 1999.
LEASES AND OTHER OBLIGATIONS
A significant portion of store properties are leased, having original terms
ranging from 10 to 25 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 years 1998, 1997, and 1996 were $38.6,
$37.3, and $34.5 million, of which $30.7, $29.6, and $27.5 million represent
minimum payments.
Total minimum rental commitments for non-cancelable leases in effect at 1998
year end were $33.6, $33.0, $32.3, $30.6, and $28.1 million for fiscal years
1999 through 2003, and $294.3 million thereafter.
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 $5.1
million restricted for letters of credit at fiscal year end 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.
LONG TERM DEBT
The Company purchased equipment which was financed by a $1.7 million note which
matures on January 1, 2003. This note bears interest at a rate of 5.69%; the
first principal payment was due on February 1, 1998.
In connection with the accounting of an equity investment in RxAmerica (see
RxAmerica note), the Company issued a $13.2 million note payable which bears
interest at a fixed rate of 6.67%. The note is to be paid in equal quarterly
installments with the first principal payment made on December 29, 1997 and
the last payment being made on the October 27, 2017 maturity date.
22 LONGS DRUGS STORES ANNUAL REPORT 1998
<PAGE>
Long term debt consists of the following:
<TABLE>
<CAPTION>
Fiscal Year 1998
- ---------------------------------------------------------------
THOUSANDS
- ---------------------------------------------------------------
<S> <C>
Notes Payable 14,861
Less current portion 642
- ---------------------------------------------------------------
Long-term debt $14,219
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
At fiscal year-end 1998, future minimum principal payments on long-term debt
are as follows:
<TABLE>
<S> <C>
Fiscal Year 1999 $ 642
Fiscal Year 2000 678
Fiscal Year 2001 719
Fiscal Year 2002 768
Fiscal Year 2003 816
Thereafter 11,238
- ---------------------------------------------------------------
Total $14,861
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
EMPLOYEE COMPENSATION AND BENEFITS
The Company has approximately 17,300 full-time and part-time employees as of
January 29, 1998. Virtually all full-time employees are covered by medical,
dental 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 $11.2 million for fiscal year 1998 and $11.0 for
fiscal years 1997 and 1996. 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 compensation obligations under the plan may not exceed $10.0 million.
Deferred compensation was $3.2 million and $2.0 million at the 1998 and 1997
fiscal year ends.
TAXES ON INCOME
Significant components of the Company's deferred tax assets and liabilities as
of January 29, 1998 and January 30, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year 1998 1997
- ---------------------------------------------------------------
THOUSANDS
<S> <C> <C>
Deferred Tax Assets:
Reserve for vacation pay $ 8,047 $ 8,327
Reserve for worker's compensation 8,542 6,626
State income tax 2,836 2,425
Reserve for restricted stock awards 1,761 1,476
Reserve for health benefits 1,557 1,679
Other 13,085 9,680
- ---------------------------------------------------------------
35,828 30,213
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation 25,925 31,742
Basis of property 3,626 3,657
Inventories 1,844 1,347
Other 8,128 8,072
- ---------------------------------------------------------------
39,523 44,818
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Net deferred tax liability $ 3,695 $14,605
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year 1998 1997 1996
- ---------------------------------------------------------------
THOUSANDS
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $38,518 $27,849 $28,367
State 9,694 7,938 8,378
- ---------------------------------------------------------------
48,212 35,787 36,745
Deferred (10,912) 3,113 (6,145)
- ---------------------------------------------------------------
Total $37,300 $38,900 $30,600
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
The reconciliation between the federal statutory tax rate and the Company's
effective tax rates are as follows:
<TABLE>
<CAPTION>
Fiscal Year 1998 Percent
- ---------------------------------------------------------------
THOUSANDS
- ---------------------------------------------------------------
<S> <C> <C>
Federal income taxes at statutory rate $33,259 35.00%
State income tax net of federal benefits 4,940 5.20%
Benefits of ESOP dividends (1,306) (1.37%)
Other 407 0.42%
- ---------------------------------------------------------------
$37,300 39.25%
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
The effective tax rate in fiscal years 1998 and 1997 differ from the federal
statutory rate of 35%, primarily due to state income taxes offset by the
benefit of ESOP dividends.
GUARANTEE OF PROFIT SHARING PLAN DEBT
In March 1989, the Company sold 1,393,728 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. The Company has
no obligation to repurchase outstanding shares held by the Plan. 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. It is expected that all
shares will be allocated within the term of the loan. Members are allocated
shares of Longs' common stock equal in value to the cash dividends on their
allocated shares used to repay the loan. 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 (ESOP) were as follows:
<TABLE>
<CAPTION>
Fiscal Year 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Allocated shares 1,171,488 1,075,552
Unallocated shares 222,240 318,176
- ---------------------------------------------------------------
Total 1,393,728 1,393,728
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</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
fiscal years 1998, 1997 and 1996.
CONTINGENT LIABILITIES
A purported class action has been filed against Longs on behalf of pharmacist
employees. The lawsuit claims the Company engaged in improper pay practices and
failed to keep adequate records. Plaintiffs seek damages and penalties in
unspecified amounts. The Company will vigorously defend itself. At this time it
is not known what financial impact, if any, this action may have on the
Company's financial results.
The Company is also subject to various lawsuits and claims arising out of its
businesses. In the opinion of management, after consultation with counsel,
the disposition of these matters will not have a material adverse effect,
individually or in the aggregate, on the Company's financial position,
results of operations, or liquidity.
LONGS DRUGS STORES ANNUAL REPORT 1998 23
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's current assets and liabilities, long-term
debt, and Guarantee of Profit Sharing Plan debt approximates the estimated fair
value.
STOCKHOLDERS' EQUITY
Authorized capital stock consists of 120 million shares of common stock, $.50
par value, and 30 million shares of preferred stock. Each outstanding share of
common stock has a Preferred Stock Purchase Right (expiring in September 2006)
which is exercisable only upon the occurrence of certain changes in control
events. These new rights replaced previous rights which expired in September
1996. There have been no events that would allow these rights to be exercised.
The company has a Restricted Stock Award program in which certain individuals
may be granted stock in the Company, with some restrictions. Recipients have
voting rights to the shares and dividends are credited to the shares during the
restriction period. However, transfer of ownership of the shares is dependent
on continued employment for periods of one to five years. The portion not yet
expensed for these programs ($2.8 million) at January 29, 1998, has been netted
against Additional Capital. During fiscal years 1998, 1997, and 1996; 90,140,
73,600 and 69,200 shares were awarded under these programs.
In November, 1994, the Board of Directors authorized a plan to repurchase up
to four million shares of the Company's outstanding common stock. As of
fiscal year 1998, the Company has repurchased 1,739,000 shares at a cost of
$32.6 million in connection with the repurchase plan.
During fiscal year 1998, the Company also repurchased 368,000 common shares
from the Profit Sharing Plan at market values totaling $9.7 million and
434,000 common shares from the T.J., J.M. and V.M. Long foundations at market
values totaling $10.8 million.
RXAMERICA
On November 6, 1997, Longs Drug Stores and American Drug Stores, Inc. announced
the merger of their pharmacy benefit management (PBM) subsidiaries and pharmacy
mail order operations. The joint venture agreement combines the operations of
Integrated Health Concepts, the PBM subsidiary of Longs, and RxAmerica, the PBM
subsidiary of American Drug Stores. The new joint venture has retained the name
RxAmerica. Most of the benefit of the joint venture is recognized on a per
claim basis to the store filling a prescription. Remaining net operating income
or losses is shared equally and was not material to operations in fiscal year
1998. In consideration of Longs 50% interest in the joint venture, Longs
contributed $5.0 million in cash, a note payable for $13.2 million, and assets
totaling $1.6 million.
SETTLEMENT OF LAWSUIT
The Company's subsidiary, Longs Drug Stores California, Inc. ("Subsidiary"),
was 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-complaints by certain co-defendants in Walco. The cases alleged that
investors invested in partnerships involved in the business of "diverting"
grocery products and that many of the diverting transactions were fictitious.
The complaints further alleged that a former employee of Subsidiary received
bribe payments in return for his willingness to confirm fraudulent
transactions, and they claimed that the Subsidiary was secondarily liable for
damages based on the acts of its former employee. Plaintiffs in both actions
sought damages for the investors' losses, which were alleged to have been
several hundred million dollars.
In February 1996, the Company concluded settlement negotiations with
representatives of the plaintiffs in these actions whereby claims against the
Company and its affiliates would be released in exchange for the Company's
cash payment of $13 million, in addition to certain contingent insurance
proceeds. The Company elected to settle these lawsuits to avoid the expense
and the uncertainty of a trial. The $13 million settlement funds were paid
into an escrow account and then released in September 1997, at which time the
settlement became finally effective.
SUBSEQUENT EVENT
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.
QUARTERLY FINANCIAL DATA (UNAUDITED)
THOUSANDS EXCEPT SHARE DATA
<TABLE>
<CAPTION>
Earnings Dividends Stock
Gross Net Per Per Price
Sales Profit Income Diluted Share (1) Share Range
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter 1 $ 710,934 $188,777 $14,080 .36 .14 $23-27
Quarter 2 718,267 190,068 12,264 .31 .14 24-27
Quarter 3 714,597 189,609 9,995 .26 .14 25-28
Quarter 4 809,123 217,723 21,387 .56 .14 25-32
- ----------------------------------------------------------------------------------------------------------------------------
FYE 1998 $2,952,921 $786,177 $57,726 $1.49 $.56 23-32
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Quarter 1 $ 665,408 $180,831 $14,048 .36 .14 $22-24
Quarter 2 681,503 181,719 13,512 .34 .14 19-23
Quarter 3 666,909 176,458 9,374 .24 .14 19-23
Quarter 4 814,518 215,246 21,678 .56 .14 22-25
- ----------------------------------------------------------------------------------------------------------------------------
FYE 1997 $2,828,338 $754,254 $58,612 $1.50 $.56 19-25
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
FIVE YEAR SELECTED FINANCIAL DATA
THOUSANDS EXCEPT SHARE DATA
<TABLE>
<CAPTION>
Fiscal 1998 1997 1996 1995 1994(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $2,952,921 $2,828,338 $2,664,376 $2,558,269 $2,499,224
Net Income 57,726 58,612 46,228(1) 48,731 52,782
Net Income per Diluted Share 1.49 1.50 1.15(1) 1.18 1.29
Dividends per Share .56 .56 .56 .56 .56
Total Assets 946,289 879,649 853,557 827,961 794,804
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $14 million lawsuit settlement in fourth quarter and fiscal year
1996, reducing after-tax net income by $8.4 million, or $.21 per share.
(2) Includes cumulative effect of accounting change, increasing net income by $3
million, or $.08 per share.
24 LONGS DRUGS STORES ANNUAL REPORT 1998
<PAGE>
BOARD OF DIRECTORS AND OFFICERS OF LONGS DRUG STORES
BOARD OF DIRECTORS
ROBERT M. LONG
Chairman of the Board and
Chief Executive Officer
RICHARD M. BROOKS*
Financial Consultant
WILLIAM G. COMBS
Vice President, Administration (retired)
DAVID G. DESCHANE
Vice President/District Manager (retired)
EDWARD E. JOHNSTON*
Insurance Consultant
MARY S. METZ, PH.D.*
Dean
U.C. Berkeley Extension
RONALD A. PLOMGREN
Senior Vice President, Development
and Chief Financial Officer
STEPHEN D. ROATH
President
GERALD H. SAITO
Senior Vice President/
District Manager
HAROLD R. SOMERSET*
Business Consultant
DONALD L. SORBY, PH.D.*
Pharmaceutical Consultant
THOMAS R. SWEENEY
Vice President/District Manager (retired)
FREDERICK E. TROTTER*
President,
F.E. Trotter Inc.
SENIOR OFFICERS OF LONG DRUG STORES CALIFORNIA, INC.
ROBERT M. LONG**
Chairman of the Board and
Chief Executive Officer
STEPHEN D. ROATH**
President
BILL M. BRANDON
Senior Vice President/
Regional Manager
TERRY D. BURNSIDE
Senior Vice President, Marketing
DAVID J. FONG
Senior Vice President, Pharmacy
ORLO D. JONES**
Senior Vice President, Properties
and Secretary
BRIAN E. KILCOURSE
Senior Vice President,
Chief Information Officer
RONALD E. LOVELADY
Senior Vice President,
Human Resources
RONALD A. PLOMGREN**
Senior Vice President, Development,
and Chief Financial Officer
GERALD H. SAITO
Senior Vice President/
District Manager
DAN R. WILSON
Senior Vice President/
Regional Manager
OFFICERS OF LONG DRUG STORES CALIFORNIA, INC.
LESLIE C. ANDERSON
Vice President,
Human Resources Administration
AL A. ARRIGONI
Vice President, Construction
and Assistant Secretary
DONALD C. BASILE
Vice President/District Manager
MARTIN A. BENNETT
Vice President/District Manager
JAMES L. FAMINI
Vice President/District Manager
STEPHEN W. FRYSLIE
Vice President/District Manager
LARRY C. GHERLONE
Vice President/District Manager
J. RICHARD JOHNSTON
Vice President/District Manager
SAL PETRUCELLI
Vice President/District Manager
MICHAEL K. RAPHEL
Vice President, Real Estate
and Assistant Secretary
CLAY E. SELLAND**
Vice President, Treasurer
and Assistant Secretary
MARTINE A. STEPHENSON
Vice President/District Manager
KYLE J. WESTOVER
Vice President,
Human Resources Development
GROVER L. WHITE**
Vice President, Controller
and Assistant Secretary
ROBERT W. WILSON
Vice President/District Manager
TRANSFER AGENT & REGISTRAR
ChaseMellon Shareholder Services
San Francisco, CA
INDEPENDENT AUDITORS
Deloitte &Touche LLP
San Francisco, CA
GENERAL COUNSEL
Bell, Rosenberg & Hughes LLP
Oakland, CA
Howard, Rice, Nemerovski, Canady, Falk & Rabkin
San Francisco, CA
INQUIRIES
Communications concerning stock transfer requirements, lost certificates and
changes of address should be directed to the Transfer Agent. Other stockholder
or investor inquiries should be directed to:
INVESTOR RELATIONS
Longs Drug Stores Corporation
P.O. Box 5222
Walnut Creek, CA 94596
(925) 937-1170
FORM 10-K
The Company's Form 10-K as filed with the Securities and Exchange Commission
is available without charge by writing to the Corporate Treasurer. Company
financial information is also available on the World Wide Web at
http://www.longs.com and through our toll-free telephone service,
1-888-LDG-NEWS.
ANNUAL MEETING
The Company's annual meeting of stockholders will be held at 11:00 a.m., on
May 19, 1998, at the Regional Center for the Arts, 1601 Civic Drive, Walnut
Creek, CA. All stockholders are cordially invited to attend.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements regarding the
Company's expected performance for future periods including same store sales,
new store openings, and potential acquisition. Actual results for such
periods may materially differ. Such forward-looking statements involve risks
and uncertainties, including risks of changing market conditions in the
overall economy and the retail industry, consumer demand, the opening of new
stores, completion of the acquisition, 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.
*Member of Audit Committee
**Also an officer of Longs Drug Stores Corporation
Design: Heiney & Craig, Inc., San Francisco
<PAGE>
LONGS DRUGS
141 North Civic Drive - P.O. Box 5222 - Walnut Creek - California 94596
- - (925) 937-1176
