<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 29, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from . . . . . . . . to . . . . . . . .
Commission file number 1-8978
LONGS DRUG STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 68-0048627
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
------------------------------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (925) 937-1170
--------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The Exhibit Index is located on page 4 of this form.
(Cover page 1 of 2 pages)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as computed by the price of the registrant's shares on the New York
Stock Exchange at the close of business on April 7, 1998, was approximately
$1,164,514,653.
There were 38,898,193 shares of common stock outstanding as of April 7, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The Longs Drug Stores Corporation Annual Report to Shareholders for the year
ended January 29, 1998, (hereinafter referred to as the Annual Report), has been
incorporated by reference into:
Part I - Items 1 and 3
Part II - Items 5, 6, 7, and 8
Part IV - Item 14(a)(1)
The definitive proxy statement dated April 17, 1998, as filed with the
Commission on April 16, 1998, involving the election of directors, has been
incorporated by reference into Part III, Items 10, 11, 12, and 13.
(Cover page 2 of 2 pages)
<PAGE>
PART I
ITEM 1. BUSINESS
Longs Drug Stores was founded by two brothers, Joe and Tom Long, in May of 1938
in Oakland, California.
Pharmacy is the cornerstone of Longs' business, accounting for about 34% of
sales, with script volume per day per store among the leaders in the industry.
Complementing the pharmacy business are the core categories of over-the-counter
health care products, photo and photo processing, cosmetics, and greeting cards.
The Company's decentralized philosophy allows store managers to enhance the
product mix of their store based on customer preference in the communities they
serve. Longs sells nationally advertised name-brand merchandise. Customers are
provided extra value with items sold under Longs' private label.
Longs competes in the retail drug industry with local and national chains as
well as with independent merchants. The Company's stores are located in
California, Colorado, Hawaii, and Nevada. Merchandise of the kind sold by the
Company can be found in variety stores, discount stores, supermarkets, and other
retail facilities. Price, quality of goods and services, product mix, and
convenience to the customer are a few principal elements of competition. The
business is seasonal, peaking in the fourth quarter due to the Thanksgiving and
Christmas holidays and cold and flu season. Seasonality is consistent with
competitors in the retail drug industry.
The remainder of the information required by this item is contained in the
Annual Report under the headings "Management's Discussion and Analysis" (PAGES
16-17), "Significant Accounting Policies" and "Employee Compensation and
Benefits" (PAGES 22-23).
ITEM 2. PROPERTIES
As of January 29, 1998, Longs operates 349 stores; 297 in California, 32 in
Hawaii, 12 in Nevada, and 8 in Colorado. Our stores vary in size, with the
majority ranging from 15,000 to 25,000 square feet, approximately 68% of which
is devoted to selling space. The average size of the stores opened this past
fiscal year is 15,000 square feet. The 2 corporate offices, 2 warehouses, and
124 of our stores are Company-owned buildings on Company-owned land; 44 stores
are Company-owned buildings on leased land; and 181 are totally leased. The
Company's properties are consistently maintained and updated and are in good
condition and suitable to meet its needs.
ITEM 3. LEGAL PROCEEDINGS
As briefly described in the Annual Report under the heading "Contingent
Liabilities" (PAGE 23), a purported class action has been filed against Longs on
behalf of pharmacist employees. The lawsuit was filed in the United States
District Court for the Northern District of California on February 18, 1998.
Plaintiffs allege that Longs violated the Federal Labor Standards Act ("FLSA")
by failing to pay pharmacist employees for overtime at one and one-half times
their regular rate, violated FLSA and California state law by failing to pay
pharmacist employees for "off-the-clock" work, and violated ERISA by failing to
maintain adequate records. Plaintiffs seek damages and penalties in unspecified
amounts, injunctive and declaratory relief, and costs of litigation, including
attorney fees. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter period covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are now executive officers of the Company and the Board of
Directors intends to reelect them to their current offices.
<TABLE>
<CAPTION>
POSITION
HELD
NAME AGE PRIMARY EXECUTIVE POSITION WITH REGISTRANT SINCE(1)(2)
---- --- ------------------------------------------ ----------
<S> <C> <C> <C>
R. M. Long 59 Chairman of the Board and 1991
Chief Executive Officer(3) 1977
S. D. Roath 56 President(3) 1991
B. M. Brandon 59 Senior Vice President, Regional Manager 1988
D. J. Fong 49 Senior Vice President, Pharmacy 1995
O. D. Jones 59 Senior Vice President, Properties, 1987
and Secretary 1976
B. E. Kilcourse 46 Senior Vice President, Chief Information 1997
Officer
R. E. Lovelady 51 Senior Vice President, Human Resources 1997
R. A. Plomgren 63 Senior Vice President, Development 1976
and Chief Financial Officer(3) 1995
G. H. Saito 53 Senior Vice President, District Manager(3) 1995
D. R. Wilson 56 Senior Vice President and 1988
Regional Manager 1997
G. L. White 57 Vice President, Controller, 1988
and Secretary
C. E. Selland 41 Vice President, Treasurer, Assistant 1994
Secretary
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</TABLE>
(1) Each officer is elected for a one-year term.
(2) All of the executive officers of the Company have been employed by the
Company for at least the past five years in executive capacities or in
related areas of responsibility.
(3) Also serves as a Director of the Company.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market on which the Company's common stock is traded is the New
York Stock Exchange under the symbol "LDG." The number of shareholders as of
April 7, 1998, was 14,875. The additional information required by this item is
contained in the Annual Report under the headings "Statements of Consolidated
Stockholders' Equity" (PAGE 21), "Stockholders' Equity" (PAGE 24), and
"Quarterly Financial Data (Unaudited)" (PAGE 24). Such information is hereby
incorporated by reference and filed herewith.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item is contained in the Annual Report under the
heading "Management's Discussion and Analysis" (PAGES 16-17) and "Five Year
Selected Financial Data" (PAGE 24). Such information is hereby incorporated by
reference and filed herewith.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this item is contained in the Annual Report under the
heading "Management's Discussion and Analysis" (PAGES 16-17). Such information
is hereby incorporated by reference and filed herewith.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is contained in the Annual Report (PAGES
18-24). Such information is hereby incorporated by reference and filed
herewith.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors is contained in a
definitive proxy statement dated April 17, 1998, as filed with the Securities
and Exchange Commission on April 16, 1998. Such information is hereby
incorporated by reference. Certain information relating to executive officers
of the Company is reported in Part I, Item 4 (PAGE 2) of this report, entitled
"Executive Officers of the Registrant."
Information regarding compliance with Section 16 of the Securities and Exchange
Act of 1934 is set forth in the definitive proxy statement dated April 17, 1998,
as filed with the Commission on April 16, 1998, and is hereby incorporated by
reference.
Items 11, 12, and 13 are omitted since the Company filed on April 16, 1998, with
the Securities and Exchange Commission a definitive proxy statement dated April
17, 1998, involving the election of directors, for the Annual Meeting on May 19,
1998. Such information is hereby incorporated by reference.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
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The following financial statements and independent auditors' report
appearing in the Annual Report on pages 18 through 24 are
incorporated herein by reference:
Independent Auditors' Report.
Statements of Consolidated Income for the fiscal years ended
January 29, 1998, January 30, 1997, and January 25, 1996.
Consolidated Balance Sheets as of January 29, 1998, and
January 30, 1997.
Statements of Consolidated Cash Flows for the fiscal years
ended January 29, 1998, January 30, 1997, and January 25, 1996.
Statements of Consolidated Stockholders' Equity for the fiscal
years ended January 29, 1998, January 30, 1997, and January
25, 1996.
Notes to Consolidated Financial Statements.
(a)(2) Not applicable.
(a)(3) EXHIBITS
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Exhibit
No.
3. Articles of Incorporation and By-Laws
a. Amended Articles of Incorporation, amended May 22, 1996,
is incorporated herein by reference as previously filed
with the Commission on September 6, 1996, as Exhibit 1 to
Form 10-Q.
b. Restated Articles of Incorporation, amended June 17, 1997,
as incorporated herein by reference, as previously filed
with the Commission on September 12, 1997, as Exhibit 1 to
Form 10-Q.
c. By-Laws of Longs Drug Stores Corporation, amended February
25, 1997, is incorporated herein by reference as previously
filed with the Commission on April 17, 1997, as Exhibit 3b
to Form 10-K.
10. Material Contracts
a. Agreement for terminal benefits in the event of uninvited
change in corporate control of Longs Drug Stores California,
Inc., is incorporated herein by reference as previously
filed with the Commission on April 28, 1986, as Exhibit 10f
to Form 10-K.
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<PAGE>
Exhibit Page
No.: Number
b. Long Term Incentive Plan of 1987 of Longs Drug Stores
Corporation is incorporated herein by reference as
previously filed with the Commission on March 13, 1987,
on Form S-8, Registration No. 033-12653.
c. Note Purchase Agreement of Longs Drug Stores
California, Inc., dated April 28, 1989, is incorporated
herein by reference as previously filed with the
Commission on April 18, 1990, as Exhibit 10n to Form
10-K.
d. The 1995 Long-Term Incentive Plan of Longs Drug Stores
Corporation is incorporated herein by reference as
previously filed with the Commission on August 5, 1994,
on Form S-8, Registration No. 033-54959.
e. The Longs Drug Stores Corporation Deferred Compensation
Plan of 1995 is incorporated herein by reference as
previously filed with the Commission on June 6, 1995,
on Form S-8, Registration No. 033-60005.
f. Renewal of the Agreements for Termination Benefits
dated August 22, 1996, are incorporated herein by
reference as Exhibit 1, as executed by the Chairman,
CEO, and President; Exhibit 2, as executed by the
Senior Vice Presidents, District Managers, and
Treasurer; Exhibit 3, as executed by Select Key
Executives and Store Managers as previously filed with
the Commission on December 6, 1996.
g. Shareholder Rights Agreement of Longs Drug Stores
Corporation dated August 20, 1996, is incorporated
herein by reference as previously filed with the
Commission on September 16, 1996, as Exhibit 1 to Form
8-K.
h. Business Loan Agreement dated November 26, 1997, is
incorporated herein as Exhibit 10h to Form 10-K.
13. Annual Report. . . . . . . . . . . . . . . . . . (Enclosed)
21. Subsidiary of the Registrant - Longs Drug Stores California,
Inc., a California Corporation.
23. Consent of Auditors
a. Independent Auditors' Consent. . . . . . . . . . . . . . 8
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
There have been no reports on Form 8-K filed during the quarter ended
January 29, 1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 April 16, 1998 /s/ G.L. White
---------------------- -----------------------------------
(G.L. White)
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
DATE April 16, 1998 /s/ R.A. Plomgren
---------------------- -----------------------------------
(R.A. Plomgren)
Senior Vice President - Development
and Director
(CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
DATE SIGNATURE
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April 16, 1998 By /s/ R.M. Long
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(R.M. Long)
Chairman of the Board
Chief Executive Officer and
Director
April 16, 1998 By /s/ S.D. Roath
---------------------- -----------------------------------
(S.D. Roath)
President and Director
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<PAGE>
DATE SIGNATURE
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April 16, 1998 By /s/ R.M. Brooks
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(R.M. Brooks)
Director
April 16, 1998 By /s/ W.G. Combs
---------------------- -----------------------------------
(W.G. Combs)
Retired Vice President and
Director
April 16, 1998 By /s/ D.G. DeShane
---------------------- -----------------------------------
(D.G. DeShane)
Director
April 16, 1998 By /s/ E.E. Johnston
---------------------- -----------------------------------
(E.E. Johnston)
Director
April 16, 1998 By /s/ M.S. Metz
---------------------- -----------------------------------
(M.S. Metz)
Director
April 16, 1998 By /s/ G.H. Saito
---------------------- -----------------------------------
(G.H. Saito)
Director
April 16, 1998 By /s/ H.R. Somerset
---------------------- -----------------------------------
(H.R. Somerset)
Director
April 16, 1998 By /s/ D.L. Sorby
---------------------- -----------------------------------
(D.L. Sorby, Ph.D.)
Director
April 16, 1998 By /s/ T.R. Sweeney
---------------------- -----------------------------------
(T.R. Sweeney)
Director
April 16, 1998 By /s/ F.E. Trotter
---------------------- -----------------------------------
(F.E. Trotter)
Director
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<PAGE>
BUSINESS LOAN AGREEMENT
This Agreement dated as of November 26, 1997, is between Bank of America
National Trust and Savings Association (the "Bank") and Longs Drug Stores
California, Inc. (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the
Bank will provide a line of credit to the Borrower. The amount of the line
of credit (the "Commitment") is Sixty-Five Million Dollars ($65,000,000).
(b) This is a revolving line of credit providing for cash
advances, letters of credit, and financing overdrafts. During the
availability period, the Borrower may repay principal amounts and reborrow
them.
(c) The Borrower agrees not to permit the outstanding
principal balance of advances under the line of credit plus the outstanding
amounts of any letters of credit, including amounts drawn on letters of
credit and not yet reimbursed, plus the amount of the Overdraft Limit (as
defined below), to exceed the Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between
the date of this Agreement and August 31, 2002 (the "Expiration Date") unless
the Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as
described below, the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly
announced from time to time by the Bank in San Francisco, California, as
its Reference Rate. The Reference Rate is set by the Bank based on various
factors, including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing
some loans. The Bank may price loans to its customers at, above, or below
the Reference Rate. Any change in the Reference Rate shall take effect at
the opening of business on the day specified in the public announcement of
a change in the Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on December 1, 1997, and
then monthly thereafter until payment in full of any principal outstanding
under this line of credit.
(b) The Borrower will repay in full all principal and any
unpaid interest or other charges outstanding under this line of credit no
later than the Expiration Date. Any amount bearing interest at an optional
interest rate (as described below) may be repaid at the end of the
applicable interest period, which shall be no later than ninety (90) days
after the Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based
on the Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below during interest periods agreed to by the Bank and the Borrower.
The optional interest rates shall be subject to the terms and conditions
described later in this Agreement. Any principal amount bearing interest at an
optional rate under this Agreement is referred to as a "Portion." The following
optional interest rates are available:
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<PAGE>
(a) Fixed Rates equal to the Base Rate plus .275 percentage
point.
(b) the Cayman Rate plus .275 percentage point.
(c) the LIBOR Rate plus .275 percentage point.
1.6 LETTERS OF CREDIT.
(a) This line of credit may be used for financing:
(i) commercial letters of credit with a maximum
maturity not to extend more than 150 days beyond the Expiration Date. Each
commercial letter of credit will require drafts payable at sight or up to
180 days after sight.
(ii) standby letters of credit with a maximum
maturity not to extend more than 60 days beyond the Expiration Date. The
standby letters of credit may include a provision providing that the
maturity date will be automatically extended each year for an additional
year unless the Bank gives written notice to the contrary; provided,
however, that each letter of credit must include a final maturity date
which will not be subject to automatic extension.
(iii) The amount of letters of credit outstanding at
any one time (including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Ten Million Dollars ($10,000,000) for commercial
letters of credit and Two Million Dollars ($2,000,000) for standby letters
of credit.
(iv) The following letter of credit is outstanding
from the Bank for the account of the Borrower:
<TABLE>
<CAPTION>
<S> <C>
Letter of Credit Number Amount
----------------------- ------
133063 $160,000
</TABLE>
As of the date of this Agreement, this letter of credit shall be deemed to
be outstanding under this Agreement and shall be subject to all the terms
and conditions stated in this Agreement.
(b) The Borrower agrees:
(i) any sum drawn under a letter of credit may, at
the option of the Bank, be added to the principal amount outstanding under
this Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to
immediately prepay and make the Bank whole for any outstanding letters of
credit.
(iii) the issuance of any letter of credit and any
amendment to a letter of credit is subject to the Bank's written approval
and must be in form and content satisfactory to the Bank and in favor of a
beneficiary acceptable to the Bank.
(iv) to sign the Bank's form Application and
Agreement for Commercial Letter of Credit or Application and Agreement for
Standby Letter of Credit or such other documentation as the Bank may
require to evidence the terms and conditions of the Borrower's
reimbursement obligations with respect to letters of credit issued by the
Bank pursuant to this Agreement.
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<PAGE>
(v) to pay any issuance and/or other fees that the
Bank notifies the Borrower will be charged for issuing and processing
letters of credit for the Borrower.
(vi) to allow the Bank to automatically charge its
checking account for applicable fees, discounts, and other charges.
1.7 OVERDRAFT FINANCING FACILITY.
(a) This line of credit may be used to pay overdrafts in
the Borrower's checking accounts. The total amount of all unreimbursed
overdrafts outstanding at any one time may not exceed Five Million Dollars
($5,000,000) (the "Overdraft Limit"). This portion of the line of credit
may only be accessed through this overdraft facility. The total amount of
all other credit outstanding at any time may not exceed the Commitment,
minus the Overdraft Limit.
(b) The checking accounts which the Borrower may overdraw
are listed below, together with the allocated Overdraft Limit for each
account:
<TABLE>
<CAPTION>
<S> <C>
ACCOUNT NUMBER OVERDRAFT LIMIT
-------------- ---------------
14725-01700 $5,000,000
</TABLE>
(c) As part of the monthly calculation of service charges
to be assessed against the Borrower's account, the Bank will include an
interest charge calculated on the daily amount of unreimbursed overdrafts
outstanding in the account. The interest rate will be an annual rate equal
to the Bank's Reference Rate.
(d) If items are presented against an account covered by
this overdraft facility which, if paid, would exceed the allocated
Overdraft Limit for that account, the Bank will have no obligation to pay
those items, but may at its discretion pay any or all of the items. The
excess amount of unreimbursed overdrafts outstanding which exceeds the
applicable limits will incur interest at the Bank's Reference Rate.
(e) The Bank may, at its discretion, at any time upon 10
days' written notice to the Borrower, terminate this overdraft facility and
require repayment of all outstanding overdrafts. The Borrower will in any
event repay all outstanding overdrafts no later than the Expiration Date.
(f) For the purposes of this Agreement, the amount of
unreimbursed overdrafts outstanding on any day will equal the daily net
collected balance of the account on any day when such balance is negative.
In calculating the amount of interest accruing under this facility, the
daily net collected balance will not include provisional credits for items
in the process of collection ("Uncollected Items") as determined under the
Bank's normal practices for the Borrower's account. However, in
determining whether the Borrower has exceeded the Overdraft Limit, the
Commitment, or any other dollar limits on borrowing established in this
Agreement, the Borrower shall be given credit for such Uncollected Items.
The negative daily net collected balance may include fees and charges which
have been posted to the Borrower's account, including overdraft interest
charges. This may result in compounding of interest.
(g) The Borrower agrees that overdraft interest charges and
other fees and charges relating to its accounts may be directly debited
from its accounts.
(h) The Bank may terminate this overdraft facility if a
levy is imposed on any account covered by this facility.
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<PAGE>
1.8 EARLY TERMINATION. The Borrower may, upon not less than 7
days' prior written notice, terminate this Agreement by paying in full the
entire debt outstanding under this Agreement. Payments to be applied to
outstanding letters of credit issued pursuant to this Agreement and drafts
accepted under letters of credit issued pursuant to this Agreement may, at the
Bank's option, be used to prepay, or held as cash collateral to secure, the
Borrower's obligations to the Bank with respect to such outstanding letters of
credit and drafts.
2. OPTIONAL INTEREST RATES
2.1 OPTIONAL RATES. Each optional interest rate is a rate per
year. Interest will be paid on the last day of each interest period, and, if
the interest period is longer than one month, then on the first day of each
month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Reference Rate, unless the
Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 FIXED RATE. The election of Fixed Rates shall be subject to
the following terms and requirements:
(a) The "Base Rate" means the fixed interest rate per
annum, determined solely the Bank on the first day of the applicable
interest period for the Portion, as the rate at which the Bank would be
able to borrow funds in the Money Market in the amount of the Portion and
with a interest payment frequency and principal repayment schedule equal to
the Portion and for a term equal to the applicable interest period. The
Base Rate shall include adjustments for reserve requirements, federal
deposit insurance, and any other similar adjustment which the Bank deems
appropriate. The Base Rate is the Bank's estimate only and the Bank is
under no obligation to actually purchase or match funds for any
transaction.
(b) "Money Market" means one or more wholesale funding
markets available to the Bank, including domestic negotiable certificates
of deposit, eurodollar deposits, bank deposit notes or other appropriate
money market instruments selected by the Bank.
(c) The interest period during which the Fixed Rate will be
in effect will be 180 days or less.
(d) Each Fixed Rate Portion will be for an amount not less
than the following:
(i) for interest periods of 14 days or longer, Five
Hundred Thousand Dollars ($500,000).
(ii) for interest periods of 1 to 3 days, Two
Million Dollars ($2,000,000).
(iii) for interest periods of between 4 days and 13
days, an amount which, when multiplied by the number of days in the
applicable interest period, is not less than fifteen million
(15,000,000) dollar-days.
(e) Each prepayment of a Fixed Rate Portion, whether
voluntary, by reason of acceleration or otherwise, will be accompanied by
the amount of accrued interest on the amount prepaid, and a prepayment fee
as described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by this
Agreement. The prepayment fee shall be equal to the amount (if any) by
which:
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<PAGE>
(i) the additional interest which would have been
payable during the interest period on the amount prepaid had it not
been prepaid, exceeds
(ii) the interest which would have been recoverable
by the Bank by placing the amount prepaid on deposit in the Money
Market for a period starting on the date on which it was prepaid and
ending on the last day of the interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
2.3 CAYMAN RATE. The election of Cayman Rates shall be subject to
the following terms and requirements:
(a) The interest period during which the Cayman Rate will
be in effect will be 180 days or less. The last day of the interest period
will be determined by the Bank using the practices of the offshore dollar
inter-bank market.
(b) Each Cayman Rate Portion will be for an amount not less
than Five Hundred Thousand Dollars ($500,000) for interest periods of 30
days or longer. For shorter maturities, each Cayman Rate Portion will be
for an amount which, when multiplied by the number of days in the
applicable interest period, is not less than fifteen million (15,000,000)
dollar-days.
(c) The Borrower may not elect a Cayman Rate with respect
to any principal amount which is scheduled to be repaid before the last day
of the applicable interest period.
(d) The "Cayman Rate" means the interest rate determined by
the following formula, rounded upward to the nearest 1/100 of one percent.
(All amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
Cayman Rate = CAYMAN BASE RATE
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Cayman Base Rate" means the interest rate at
which the Bank's Grand Cayman Branch, Grand Cayman, British West Indies,
would offer U.S. dollar deposits for the applicable interest period to
other major banks in the offshore dollar inter-bank market.
(ii) "Reserve Percentage" means the total of the
maximum reserve percentages for determining the reserves to be maintained
by member banks of the Federal Reserve System for Eurocurrency Liabilities,
as defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(e) Each prepayment of a Cayman Rate Portion, whether
voluntary, by reason of acceleration or otherwise, will be accompanied by
the amount of accrued interest on the amount prepaid, and a prepayment fee
as described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by this
Agreement. The prepayment fee shall be equal to the amount (if any) by
which:
(i) the additional interest which would have been
payable during the interest period on the amount prepaid had it not
been prepaid, exceeds
(ii) the interest which would have been recoverable
by the Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or other
appropriate money market selected by the Bank for a period starting
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on the date on which it was prepaid and ending on the last day of the
interest period for such Portion (or the scheduled payment date for
the amount prepaid, if earlier).
(f) The Bank will have no obligation to accept an election
for a Cayman Rate Portion if any of the following described events has
occurred and is continuing:
(i) Dollar deposits in the principal amount, and
for periods equal to the interest period, of a Cayman Rate Portion are
not available in the offshore Dollar inter-bank market; or
(ii) the Cayman Rate does not accurately reflect the
cost of a Cayman Rate Portion.
2.4 LIBOR RATE. The election of LIBOR Rates shall be subject to
the following terms and requirements:
(a) The interest period during which the LIBOR Rate will be
in effect will be one, two, or three weeks, or one, two, three, four, five,
or six months. The first day of the interest period must be a day other
than a Saturday or a Sunday on which the Bank is open for business in
California, New York and London and dealing in offshore dollars (a "LIBOR
Banking Day"). The last day of the interest period and the actual number
of days during the interest period will be determined by the Bank using the
practices of the London inter-bank market.
(b) Each LIBOR Rate Portion will be for an amount not less
than Five Hundred Thousand Dollars ($500,000) for interest periods of one
month or longer. For shorter maturities, each Libor Rate Portion will be
for an amount which, when multiplied by the number of days in the
applicable interest period, is not less than fifteen million (1 5,000,000)
dollar-days.
(c) The "LIBOR Rate" means the interest rate determined by
the following formula, rounded upward to the nearest 1/100 of one percent.
(All amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
LIBOR Rate = LONDON INTER-BANK OFFERED RATE
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London inter-Bank Offered Rate" means the
interest rate at which the Bank's London Branch, London, Great
Britain, would offer U.S. dollar deposits for the applicable interest
period to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) London Banking Days
before the commencement of the interest period. A "London Banking
Day" is a day on which the Bank's London Branch is open for business
and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the
maximum reserve percentages for determining the reserves to be
maintained by member banks of the Federal Reserve System for
Eurocurrency Liabilities, as defined in Federal Reserve Board
Regulation D, rounded upward to the nearest 1/100 of one percent. The
percentage will be expressed as a decimal, and will include, but not
be limited to, marginal, emergency, supplemental, special, and other
reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate
Portion no later than 12:00 noon San Francisco time on the LIBOR Banking
Day preceding the day on which the London Inter-Bank Offered Rate will be
set, as specified above. For example, if there are no intervening
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holidays or weekend days in any of the relevant locations, the request must
be made at lease three days before the LIBOR Rate takes effect.
(e) The Borrower may not elect a LIBOR Rate with respect to
any principal amount which is scheduled to be repaid before the last day of
the applicable interest period.
(f) Each prepayment of a LIBOR Rate Portion, whether
voluntary, by reason of acceleration or otherwise, will be accompanied by
the amount of accrued interest on the amount prepaid and a prepayment fee
as described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by this
Agreement. The prepayment fee shall be equal to the amount (if any) by
which:
(i) the additional interest which would have been
payable during the interest period on the amount prepaid had it not
been prepaid, exceeds
(ii) the interest which would have been recoverable
by the Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or other
appropriate money market selected by the Bank, for a period starting
on the date on which it was prepaid and ending on the last day of the
interest period for such Portion (or the scheduled payment date for
the amount prepaid, if earlier).
(g) The Bank will have no obligation to accept an election
for a LIBOR Rate Portion if any of the following described events has
occurred and is continuing:
(i) Dollar deposits in the principal amount, and
for periods equal to the interest period, of a LIBOR Rate Portion are
not available in the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the
cost of a LIBOR Rate Portion.
3. FEES AND EXPENSES
3.1 UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on
any difference between the Commitment and the amount of credit it actually
uses, determined by the weighted average credit outstanding during the
specified period. The fee will be calculated at.08% per year. The
calculation of credit outstanding shall include the undrawn amount of
letters of credit.
This fee is due on December 31, 1997, and on the last day of each calendar
quarter thereafter until the Expiration Date, on which date the final
payment of this fee is due.
3.2 REIMBURSEMENT COSTS. The Borrower agrees to reimburse the
Bank for any expenses it incurs in the preparation of this Agreement and any
agreement or instrument required by this Agreement up to a maximum of Seven
Thousand Five Hundred Dollars ($7,500). Expenses include, but are not limited
to, reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 REQUESTS FOR CREDITS. Each request for an extension of credit
will be made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and
each payment by the Borrower will be:
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(a) made at the Bank's branch (or other location) selected
by the Bank from time to time;
(b) made for the account of the Bank's branch selected by
the Bank from time to time;
(c) made in immediately available funds, or such other type
of funds selected by the Bank;
(d) evidenced by records kept by the Bank. In addition,
the Bank may, at its discretion, require the Borrower to sign one or more
promissory notes.
4.3 TELEPHONE AND TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions
for advances or repayments or for the designation of optional interest
rates and telefax requests for the issuance of letters of credit given by
any one of the individuals authorized to sign loan agreements on behalf of
the Borrower, or any other individual designated by any one of such
authorized signers. The Borrower acknowledges and confirms that the
individuals designated on Exhibit A attached to this Agreement have been
designated by such authorized signers to give telephone instructions for
advances or repayments or for the designation of optional interest rates
and to make telefax requests for the issuance of letters of credit.
(b) Advances will be deposited in and repayments will be
withdrawn from the Borrower's account number 14725-01700, or such other of
the Borrower's accounts with the Bank as designated in writing by the
Borrower.
(c) The Bank will provide written confirmation to the
Borrower of transactions made based on telephone or telefax instructions.
The Borrower agrees to notify the Bank promptly of any discrepancy between
the confirmation and the telephone or telefax instructions.
(d) The Borrower indemnifies and excuses the Bank
(including its officers, employees, and agents) from all liability, loss,
and costs in connection with any act resulting from telephone or telefax
instructions the Bank reasonably believes are made by any individual
authorized by the Borrower to give such instructions. This indemnity and
excuse will survive this Agreement's termination.
4.4 DIRECT DEBIT.
(a) The Borrower agrees that interest and any fees will be
deducted automatically on the due date from the Borrower's account number
14725-01700, or such other of the Borrower's accounts with the Bank as
designated in writing by the Borrower.
(b) The Bank will debit the account on the dates the
payments become due. If a due date does not fall on a banking day, the
Bank will debit the account on the first banking day following the due
date.
(c) The Borrower will maintain sufficient funds in the
account on the dates the Bank enters debits authorized by this Agreement.
If there are insufficient funds in the account on the date the Bank enters
any debit authorized by this Agreement, the debit will be reversed.
4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California. For amounts bearing interest at an offshore rate
(if any), a banking day is a day other than a Saturday or a Sunday on
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which the Bank is open for business in California and dealing in offshore
dollars. All payments and disbursements which would be due on a day which is
not a banking day will be due on the next banking day. All payments received on
a day which is not a banking day will be applied to the credit on the next
banking day.
4.6 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand,
for the Bank's costs or losses arising from any statute or regulation, or any
request or requirement of a regulatory agency which is applicable to all
national banks or a class of all national banks. The costs and losses will be
allocated to the loan in a manner determined by the Bank, using any reasonable
method. The costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets
and commitments for credit.
4.7 INTEREST CALCULATION. Except as otherwise stated in this
Agreement, all interest and fees, if any, will be computed on the basis of a
360-day year and the actual number of days elapsed. This results in more
interest or a higher fee than if a 365-day year is used. Installments of
principal which are not paid when due under this Agreement shall continue to
bear interest until paid.
4.8 DEFAULT RATE. Upon the occurrence and during the continuation
of any default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Bank bear interest at a rate which is 2.0
percentage points higher than the rate of interest otherwise provided under this
Agreement. This will not constitute a waiver of any default.
4.9 INTEREST COMPOUNDING. At the Bank's sole option in each
instance, any interest, fee or costs which are not paid when due under this
Agreement shall bear interest from the due date at the Bank's Reference Rate.
This may result in compounding of interest.
5. CONDITIONS
The Bank must receive the following items, in form and content
acceptable to the Bank, before it is required to extend an credit to the
Borrower under this Agreement:
5.1 AUTHORIZATIONS. Evidence that the execution, delivery and
performance by the Borrower of this Agreement and any instrument or agreement
required under this Agreement have be authorized.
5.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of
incorporation.
5.3 LETTER OF RESPONSIBILITY. Letter of responsibility signed by
Longs Drug Stores Corporation ("LDSC") in the amount of One Hundred Twenty-Five
Million Dollars ($125,000,000).
5.4 OTHER ITEMS. Any other items that the Bank reasonably
requires as mutually agreed to by the Bank and the Borrower.
6. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in
full, the Borrower makes the following representations and warranties. Each
request for an extension of credit constitutes a renewed representation.
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<PAGE>
6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly
formed and existing under the laws of the state where organized.
6.2 AUTHORIZATION. This Agreement, and any instrument or
agreement required hereunder, are within the Borrower's powers, have been duly
authorized, and do not conflict with any of its organizational papers.
6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and
binding agreement of the Borrower, enforceable against the Borrower in
accordance with its terms, and any instrument or agreement required hereunder,
when executed and delivered, will be similarly legal, valid, binding and
enforceable.
6.4 GOOD STANDING. In each state in which the Borrower does
business, it is properly licensed, in good standing, and, where required, in
compliance with fictitious name statutes.
6.5 NO CONFLICTS. This Agreement does not conflict with any law,
agreement, or obligation by which the Borrower is bound.
6.6 FINANCIAL INFORMATION. All financial and other information
that has been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate
knowledge of the Borrower's financial condition, including all material
contingent liabilities.
(b) in compliance with all government regulations that
apply.
6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute
pending or threatens against the Borrower which, if lost, would have a material
adverse effect on the Borrower's financial condition or ability to repay this
credit, except as have been disclosed in writing to the Bank.
6.8 PERMITS, FRANCHISES. The Borrower possesses all permits,
memberships, franchise contracts and licenses required and all trademark rights,
trade name rights, patent rights and fictitious name rights necessary to enable
it to conduct the business in which it is now engaged.
6.9 OTHER OBLIGATIONS. The Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
6.10 INCOME TAX MATTERS. The Borrower has no knowledge of any
pending assessments or adjustments of its income tax for any year.
6.11 NO EVENT OF DEFAULT. There is no event which is, or with
notice or lapse of time or both would be, a default under this Agreement.
6.12 INSURANCE. The Borrower has obtained, and maintained in
effect, the insurance coverage required in the "Covenants" section of this
Agreement.
6.13 LOCATION OF BORROWER. The Borrower's place of business (or,
if the Borrower has more than one place of business, its chief executive office)
is located at 141 North Civic Drive, Walnut Creek, California 94596.
6.14 RELATIONSHIP TO LDSC. The Borrower is a wholly-owned
subsidiary of LDSC and is primary contributor of LDSC's earnings and cash flow
as reflected in the quarterly and annual financial statements filed by LDSC with
the Securities and Exchange Commission.
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<PAGE>
6.15 YEAR 2000 COMPLIANCE. The Borrower has conducted a
comprehensive review and assessment of the Borrower's computer applications and
made inquiry of the Borrower's key suppliers, vendors and customers with respect
to the "year 2000 problem" (that is, the risk that computer applications may not
be able to properly perform date-sensitive functions after December 31, 1999)
and, based on that review and inquiry, the Borrower does not believe the year
2000 problem will result in a material adverse change in the Borrower's business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
7. COVENANTS
The Borrower agrees, so long as credit is available under this
Agreement and until the Bank is repaid in full:
7.1 USE OF PROCEEDS. To use the proceeds of the credit only for
general corporate purposes.
7.2 FINANCIAL INFORMATION. To provide the following financial
information and statements in form and content acceptable to the Bank and such
additional information as requested by the Bank from time to time:
(a) Within 90 days of LDSC's fiscal year end, LDSC's annual
financial statements. These financial statements must be audited (with an
opinion not qualified in any manner, including not qualified due to
possible failure to take all appropriate steps to successfully address year
2000 systems issues) by a Certified Public Accountant ("CPA") acceptable to
the Bank. The statements shall be prepared on a consolidated basis.
(b) Within 45 days of the period's end, LDSC's quarterly
financial statements. These financial statements may be prepared by LDSC.
The statements shall be prepared on a consolidated basis.
(c) Promptly, upon sending or receipt, copies of any
management letters and correspondence relating to management letters, sent
or received by the Borrower to or from the Borrower's auditor.
(d) Within the periods provided in (a) and (b) above, a
compliance certificate of the Borrower signed by an authorized financial
officer of the Borrower setting forth (i) the information and computations
(in sufficient detail) to establish that the Borrower is in compliance with
all financial covenants at the end of the period covered by the financial
statements then being furnished and (ii) whether there existed as of the
date of such financial statements and whether there exists as of the date
of the certificate, any default under this Agreement and, if any such
default exists, specifying the nature thereof and the action the Borrower
is taking and proposes to take with respect thereto.
7.3 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) all litigation affecting the Borrower with respect to
which the Borrower is required to establish a reserve in excess of Fifteen
Million Dollars ($15,000,000) pursuant to Financial Accounting Standards
Board Statement No. 5 (FASB 5) or, in the event such a reserve is not
required to be established for any reason, which the Borrower believes in
good faith is likely to be adversely determined, and if adversely
determined, is likely to result in the entry of a judgment in the amount of
Fifteen Million Dollars ($15,000,000) or more.
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(b) any dispute between the Borrower and any government
authority which, if resolved adversely with respect to the Borrower, would
have a material adverse effect on the Borrower's financial condition or
ability to repay this credit.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay this credit.
(e) any change in the Borrower's name, legal structure,
place of business, or chief executive office if the Borrower has more than
one place of business.
7.4 BOOKS AND RECORDS. To maintain adequate books and records.
7.5 AUDITS. Upon not less than 5 days' prior written notice, to
allow the Bank and its agents to inspect the Borrower's properties and examine,
audit, and make copies of books and records during the normal business hours and
at the Bank's expense. If any of the Borrower's properties, books or records
are in the possession of a third party, the Borrower authorizes that third party
to permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's reasonable requests for information concerning such
properties, books and records. Nothing in this Paragraph 7.5 shall require the
Borrower to disclose any material information which the Borrower believes in
good faith would not be material to the Bank's evaluation of the Borrower's
financial condition or ability to repay this credit.
7.6 COMPLIANCE WITH LAWS. To make every reasonable effort to
comply with the laws (including any fictitious name statute), regulations, and
orders of any government body with authority over the Borrower's business.
7.7 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
7.8 MAINTENANCE OF PROPERTIES. To make any reasonable repairs,
renewals, or replacements to keep the Borrower's properties in good working
condition.
7.9 COOPERATION. To take any reasonable action requested by the
Bank to carry out the intent of this Agreement.
7.10 GENERAL BUSINESS INSURANCE. To maintain insurance as is usual
for the business it is in.
7.11 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's
written consent (which consent will not be unreasonably withheld):
(a) engage in any material business activities
substantially different from the Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) consummate any material consolidation, merger, or other
combination, or become a partner in a partnership, a member of a joint
venture, or a member of a limited liability company except partnerships,
joint ventures, or limited liability companies (i) entered into by the
Borrower in the ordinary course of its business as presently conducted or
(ii) in which the Borrower's aggregate investments or capital contributions
do not exceed Fifty Million Dollars ($50,000,000).
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<PAGE>
(d) sell, assign, lease, transfer or otherwise dispose of
all or a substantial part of the Borrower's business or the Borrower's
assets except in an aggregate amount not exceeding Fifty Million Dollars
($50,000,000) in any fiscal year.
(e) enter into any sale and leaseback agreement covering
any of its fixed or capital assets in which the value of the assets exceeds
Fifty Million Dollars ($50,000,000).
(f) acquire or purchase a business or its assets for a
consideration, including assumption of direct or contingent debt, in excess
of Seventy-Five Million Dollars ($75,000,000) for any single acquisition or
purchase transaction or in excess of One Hundred Million Dollars
($100,000,000) for all such transactions in any single fiscal year. It is
provided, however, that the Borrower may not acquire or purchase any
business entity or the assets of any business entity (i) that engages in
activities substantially different from the Borrower's present business or
(ii) if such acquisition or purchase is opposed by such entity's board of
directors or other governing body or if the Borrower has knowledge of facts
or circumstances that indicate that such acquisition or purchase is likely
to be hostile or unfriendly.
(g) sell, assign, lease, transfer or otherwise dispose of
any assets for less than fair market value, or enter into any agreement to
do so, except in an aggregate amount not exceeding Fifty Million Dollars
($50,000,000) in any fiscal year.
7.12 CHANGE OF OWNERSHIP. Not to cause, permit, or suffer any
change, direct or indirect, in the Borrower's capital ownership in excess of
30%.
7.13 LIENS ON INVENTORY AND ACCOUNTS. Not to create, assume, or
allow any security interest or lien (including judicial liens) on any inventory
or accounts the Borrower now or later owns, except liens and security interests
in favor of the Bank and liens for taxes not yet due.
8. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss
or liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply
whether the hazardous substance is on, under or about the Borrower's property or
operations or property leased to the Borrower. The indemnity includes but is
not limited to attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). The indemnity extends to the
Bank, its parent, subsidiaries and all of their directors, officers, employees,
agents, successors, attorneys and assigns. "Hazardous substances" means any
substance, material or waste that is or becomes designated or regulated as
"toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrower's obligations to the Bank. This
indemnity will not apply to any loss or liability of the Bank arising from the
Bank's own gross negligence or willful misconduct or prior ownership of the
property, or arising from the Bank's credit relationship with the owner of
property leased by the Borrower.
9. DEFAULT
If any of the following events occurs, the Bank may do one or more of
the following: declare the Borrower in default, stop making any additional
credit available to the Borrower, and require the Borrower to repay its entire
debt immediately and without prior notice. If an event of default occurs under
the paragraph entitled "Bankruptcy," below, with respect to the Borrower. then
the entire debt outstanding under this Agreement will automatically be due
immediately.
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9.1 FAILURE TO PAY. The Borrower fails to make a payment under
this Agreement when due and such failure to pay continues for a period of 3 days
after written notice is given by the Bank to the Borrower.
9.2 FALSE INFORMATION. The Borrower has given the Bank
information or representations that are false or misleading in any material
respect.
9.3 BANKRUPTCY. The Borrower or any of the Borrower's related
entities or affiliates files a bankruptcy petition, a bankruptcy petition is
filed against the Borrower or any of the Borrower's related entities or
affiliates, or the Borrower or any of the Borrowers related entities or
affiliates makes a general assignment for the benefit of creditors.
9.4 RECEIVERS. A receiver or similar official is appointed for
the Borrower's business or the business of any of the Borrower's related
entities or affiliates, or any such business is terminated.
9.5 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one
or more trade creditors against the Borrower or any of the Borrower's related
entities or affiliates in an aggregate amount of Fifty Million Dollars
($50,000,000) or more in excess of any insurance coverage.
9.6 JUDGMENTS. Any judgments or arbitration awards are entered
against the Borrower or any of the Borrower's related entities or affiliates, or
the Borrower or any of the Borrower's related entities or affiliates enters into
any settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Twenty-Five Million Dollars ($25,000,000) or more in excess
of any insurance coverage.
9.7 GOVERNMENT ACTION. Any government authority takes a final
unappealable action that the Bank believes materially adversely affects the
Borrower's financial condition or ability to repay or the financial condition of
any of the Borrower's related entities or affiliates.
9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs, or
is reasonably likely to occur, in the Borrower's business condition (financial
or otherwise), operations, properties or prospects, or ability to repay this
credit or in the business condition (financial or otherwise), operations,
properties or prospects of any of the Borrower's related entities or affiliates.
9.9 CROSS-DEFAULT. Any default occurs under any agreement in
connection with any credit the Borrower or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower or
any of the Borrower's related entities or affiliates has guaranteed in the
amount of Fifteen Million Dollars ($15,000,000) or more in the aggregate if the
default consists of failing to make a payment when due or gives the other lender
the right to accelerate the obligation.
9.10 OTHER BANK AGREEMENTS. The Borrower or any of the Borrower's
related entities or affiliates"fails to meet the conditions of, or fails to
perform any material obligation under, any other agreement the Borrower or any
of the Borrower's related entities or affiliates has with the Bank or any
affiliate of the Bank if the failure gives the Bank or the Bank's affiliate
either the right to accelerate the obligations, under the agreement or the right
to terminate the agreement.
9.11 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the
material conditions of, or fails to perform any material obligation under, any
term of this Agreement not specifically referred to in this Article.
9.12 LDSC'S FINANCIAL COVENANTS. LDSC fails to comply with the
following covenants:
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(a) FUNDED DEBT TO TANGIBLE NET WORTH. To maintain on a
consolidated basis a ratio of funded debt PLUS the product of (i) lease
expense PLUS rent expense times (ii) six (6.0) to tangible net worth not
exceeding 1.0:1.0.
"Funded debt" means at any time (a) all indebtedness for borrowed money;
(b) all obligations issued, undertaken, or assumed as the deferred purchase
price of property or services (other than trade payables entered into in
the ordinary course of business on ordinary terms); (c) all noncontingent
reimbursement or payment obligations with respect to surety instruments;
(d) all obligations evidenced by notes, bonds, debentures, or similar
instruments, including obligations so evidenced incurred in connection with
the acquisition of property, assets, or businesses; (e) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to
property acquired by LDSC, the Borrower, or any other subsidiary or
affiliate of LDSC (even though the rights and remedies of the seller or
bank under such agreement in the event of default are limited to
repossession or sale of such property); (f) all obligations with respect to
capital leases; (g) all obligations to reimburse or prepay any bank or
other issuer in respect of amounts paid under letters of credit, bankers
acceptances, or similar instruments, whether drawn or undrawn; (h) all
indebtedness referred to in clauses (a) through (g) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any lien upon or in property (including
accounts and contracts rights) owned by LDSC, the Borrower, or any other
subsidiary or affiliate of LDSC, even though LDSC, the Borrower, or any
other subsidiary or affiliate of LDSC has not assumed or become liable for
the payment of such Indebtedness; and (i) all guaranty obligations in
respect of indebtedness or obligations of others of the kinds referred to
in clauses (a) through (h) above.
"Tangible net worth" means the gross book value of LDSC's assets (including
the lesser of One Hundred Twenty Million Dollars ($120,000,000) or the
total consideration paid by LDSC to repurchase or otherwise acquire shares
of the Borrower owned by Vera Long and excluding goodwill, patents,
trademarks, trade names, organization expense, treasury stock, unamortized
debt discount and expense, capitalized or deferred research and development
costs, deferred marketing expenses, deferred receivables, and other like
intangibles) LESS total liabilities, including but not limited to accrued
and deferred income taxes, and any reserves against assets.
(b) FIXED CHARGE COVERAGE RATIO. To maintain on a
consolidated basis a Fixed Charge Coverage Ratio of at least 1.75:1.0.
"Fixed Charge Coverage Ratio" means the ratio of the sum of net income PLUS
interest expense PLUS depreciation, amortization and other non-cash charges
PLUS lease expense PLUS rent expense to the sum of cash interest paid PLUS
lease expense PLUS rent expense PLUS the current portion of long-term
liabilities.
This ratio will be calculated at the end of each fiscal quarter, using the
results of that quarter and each of the 3 immediately preceding quarters.
The current portion of long term liabilities will be measured as of the
last day of the calculation period.
Any failure or anticipated failure by LDSC to comply with the above financial
covenants will constitute a default under this paragraph, whether such failure
is evidenced by financial statements delivered to the Bank or is otherwise known
to LDSC, the Borrower, or the Bank.
- 15 -
<PAGE>
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all
financial information provided to the Bank and all financial covenants will be
made under generally accepted accounting principles, consistently applied.
10.2 CALIFORNIA LAW. This Agreement is governed by California law.
10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the
Borrower's and the Bank's successors and assignees. The Borrower agrees that it
may not assign this Agreement without the Bank's prior consent. The Bank may
sell participations in or assign this loan, and may exchange financial
information about the Borrower with actual or potential participants or
assignees. If a participation is sold or the loan is assigned, the purchaser
will have the right of set-off against the Borrower.
10.4 ARBITRATION.
(a) This paragraph concerns the resolution of any
controversies or claims between the Borrower and the Bank, including but
not limited to those that arise from:
(i) This Agreement (including any renewals,
extensions or modifications of this Agreement);
(ii) Any document, agreement or procedure related to
or delivered in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any
business conducted between the Borrower and the Bank, including claims
for injury to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such
controversies or claims may be settled by arbitration in accordance with
the United States Arbitration Act. The United States Arbitration Act will
apply even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the
American Arbitration Association and will be subject to its commercial
rules of arbitration.
(d) For purposes of the application of the statute of
limitations, the filing of an arbitration pursuant to this paragraph is the
equivalent of the filing of a lawsuit, and any claim or controversy which
may be arbitrated under this paragraph is subject to any applicable statute
of limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations and,
if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is
arbitrable, the arbitrators will have the authority to resolve any such
dispute.
(f) The decision that results from an arbitration
proceeding may be submitted to any authorized court of law to be confirmed
and enforced.
(g) The procedure described above will not apply if the
controversy or claim, at the time of the proposed submission to
arbitration, arises from or relates to an obligation to the Bank
- 16 -
<PAGE>
secured by real property located in California. In this case, both the
Borrower and the Bank must consent to submission of the claim or
controversy to arbitration. If both parties do not consent to arbitration,
the controversy or claim will be settled as follows:
(i) The Borrower and the Bank will designate a
referee (or a panel of referees) selected under the auspices of the
American Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of
referees) will be appointed by a court as provided in California Code
of Civil Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the
panel) will be an active attorney or a retired judge; and
(iv) The award that results from the decision of the
referee (or the panel) will be entered as a judgment in the court that
appointed the referee, in accordance with the provisions of California
Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower
or the Bank to:
(i) exercise self-help remedies such as setoff,
(ii) foreclose against or sell any real or personal
property collateral; or
(iii) act in a court of law, before, during or after
the arbitration proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim,
additional or supplementary remedies, or the filing of a court action, does
not constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if the
other party contests the lawsuit. However, if the controversy or claim
arises from or relates to an obligation to the Bank which is secured by
real property located in California at the time of the proposed submission
to arbitration, this right is limited according to the provision above
requiring the consent of both the Borrower and the Bank to seek resolution
through arbitration.
(j) If the Bank forecloses against any real property
securing this Agreement, the Bank has the option to exercise the power of
sale under the deed of trust or mortgage, or to proceed by judicial
foreclosure.
10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
10.6 AMENDMENTS. This Agreement may not be amended or modified
except by a writing signed by the Bank and the Borrower. No such writing will
be binding on the Borrower unless it is signed by (a) the persons who sign this
Agreement on behalf of the Borrower, (b) the Chief Executive Officer, President,
or any Vice President of the Borrower, or (c) any other person or persons whose
authority is
- 17 -
<PAGE>
affirmed by (i) the Chief Executive Officer, President, or Vice President of the
Borrower and (ii) the Secretary or any Assistant Secretary of the Borrower.
10.7 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement as mutually agreed to by the Bank and the Borrower.
10.8 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for
any reasonable costs and attorneys' fees incurred by the Bank in connection with
the enforcement or preservation of any rights or remedies under this Agreement
and any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this
paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-house
counsel.
10.9 ONE AGREEMENT. This Agreement and any related security or
other agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements
between the Bank and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between
the Bank and the Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final,
complete and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.10 NOTICES. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses as
the Bank and the Borrower may specify from time to time in writing. In the
Borrower's case, all such notices shall be to the attention of the Corporate
Secretary with a copy to the Treasurer.
10.11 HEADINGS. Article and paragraph headings are for reference
only and shall not affect the interpretation or meaning of any provisions of
this Agreement.
10.12 COUNTERPARTS. This Agreement may be executed in as many
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
10.13 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the
Business Loan Agreement entered into as of February 2, 1994 between the Bank and
the Borrower, as amended, and any credit outstanding thereunder shall be deemed
to be outstanding under this Agreement.
- 18 -
<PAGE>
10.14 COMMITMENT EXPIRATION. The Bank's commitment to extend credit
under this Agreement will expire on November 30, 1997, unless this Agreement and
any documents required by this Agreement have been signed and returned to the
Bank on or before that date.
This Agreement is executed as of the date stated at the top of the first page.
Bank of America National Longs Drugs Stores California, Inc.
Trust and Savings Association
By /s/ J.S. Holmes By /s/ R.M. Long
----------------------------- ----------------------------
Typed Name: J.S. Holmes, VP (One of two required)
Title: Typed Name: R.M. LONG
Title: Chief Executive Officer
By /s/ O.D. Jones
---------------------------
(One of two required)
Typed Name: O.D. JONES
Title: Secretary
Address where notices to the Bank Address where notices to the
are to be sent: Borrower are to be sent:
San Francisco Regional Commercial P.O. Box 5222
Banking Office (#1499) Walnut Creek, CA 94596
345 Montgomery Street
Concourse Level
San Francisco, CA 94104
- 19 -
<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
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-12653, 33-54959, and 33-60005 of Longs Drug Stores Corporation on Form S-8 of
our report dated March 6, 1998 appearing in this Annual Report on Form 10-K of
Longs Drug Stores Corporation for the fiscal year ended January 29, 1998.
/s/ Deloitte & Touche LLP
April 16, 1998
- 8 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-29-1998 JAN-30-1997
<PERIOD-START> JAN-31-1997 JAN-26-1996
<PERIOD-END> JAN-29-1998 JAN-30-1997
<CASH> 48,552 22,834
<SECURITIES> 0 0
<RECEIVABLES> 63,107 49,911
<ALLOWANCES> 0 0
<INVENTORY> 345,082 356,933
<CURRENT-ASSETS> 481,322 451,374
<PP&E> 747,206 703,332
<DEPRECIATION> 312,112 285,943
<TOTAL-ASSETS> 946,289 879,649
<CURRENT-LIABILITIES> 312,769 281,817
<BONDS> 0 0
0 0
0 0
<COMMON> 19,315 19,484
<OTHER-SE> 564,828 534,102
<TOTAL-LIABILITY-AND-EQUITY> 946,289 879,649
<SALES> 2,952,921 2,828,338
<TOTAL-REVENUES> 0 0
<CGS> 2,166,744 2,074,084
<TOTAL-COSTS> 2,857,895 2,730,826
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 95,026 97,512
<INCOME-TAX> 37,300 38,900
<INCOME-CONTINUING> 57,726 58,612
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 57,726 58,612
<EPS-PRIMARY> 1.50 1.50
<EPS-DILUTED> 1.49 1.50
</TABLE>
