<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended July 29, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period from . . . . . . . . to . . . . . . . .
Commission file number 1-8978
LONGS DRUG STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 68-0048627
----------------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
----------------------------------------- -----------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (925) 937-1170
--------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
There were 39,295,961 shares of common stock outstanding as of September 8,
1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
STATEMENTS OF CONDENSED CONSOLIDATED INCOME (UNAUDITED)
<TABLE>
<CAPTION>
For the For the Two
Quarter Ended Quarters Ended
JULY 29, July 30, JULY 29, July 30,
1999 1998 1999 1998
--------- --------- --------- ---------
----------(Thousands Except Per Share)-------------
<S> <C> <C> <C> <C>
SALES $884,518 $786,795 $1,753,948 $1,539,594
COSTS AND EXPENSES:
Cost of merchandise sold 651,769 575,689 1,292,684 1,126,524
Operating and administrative 205,307 186,616 406,670 365,255
Interest expense 972 280 1,825 559
Interest income (494) (340) (845) (584)
----------- --------- ---------- ----------
INCOME BEFORE TAXES ON INCOME 26,964 24,550 53,614 47,840
TAXES ON INCOME 10,600 9,700 20,900 18,800
---------- --------- ---------- ----------
NET INCOME $ 16,364 $ 14,850 $ 32,714 $ 29,040
========== ========= ========== ==========
NET INCOME PER COMMON SHARE:
BASIC $ .42 $ .39 $ .84 $ .75
DILUTED $ .42 $ .38 $ .84 $ .75
DIVIDENDS PER COMMON SHARE $ .14 $ .14 $ .28 $ .28
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
BASIC 38,801 38,529 38,901 38,499
DILUTED 38,950 38,735 39,040 38,677
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JULY 29, July 30, January 28,
1999 1998 1999
---------- ---------- ----------
---------------(Thousands)-----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 77,511 $ 15,975 $ 14,976
Pharmacy and other receivables 69,048 60,093 68,072
Merchandise inventories 358,520 338,846 382,248
Deferred income taxes 22,391 24,706 25,388
Other 4,253 1,250 1,844
--------- --------- ---------
Total current assets 531,723 440,870 492,528
--------- --------- ---------
PROPERTY:
Land 94,762 94,032 95,359
Buildings and leasehold improvements 405,105 378,528 392,967
Equipment and fixtures 334,425 309,370 321,998
Beverage licenses 7,570 7,513 7,569
-------- --------- ---------
Total property--at cost 841,862 789,443 817,893
Less accumulated depreciation 357,716 329,052 345,995
--------- --------- ---------
Property--net 484,146 460,391 471,898
--------- --------- ---------
GOODWILL AND OTHER ASSETS 61,105 61,288 60,704
--------- --------- ---------
TOTAL $ 1,076,974 $ 962,549 $ 1,025,130
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 190,005 $ 167,929 $ 184,989
Short-term borrowings -- 12,000 10,000
Employee compensation and benefits 73,749 73,067 72,353
Taxes payable 27,383 30,115 43,700
Current portion of long-term debt and guarantee
of Profit Sharing Plan debt 3,015 4,193 1,758
Other 29,140 26,965 26,183
--------- --------- ---------
Total current liabilities 323,292 314,269 338,983
--------- --------- ---------
LONG-TERM DEBT 56,641 13,944 14,253
DEFERRED INCOME TAXES AND
OTHER LONG-TERM LIABILITIES 32,269 33,169 33,055
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock (39,296,000, 38,907,000,
and 38,946,000 shares outstanding) 19,649 19,453 19,473
Additional capital 132,910 118,195 119,961
Common stock contribution to Profit Sharing Plan -- -- 9,834
Guarantee of Profit Sharing Plan debt -- (3,533) (911)
Retained earnings 512,213 467,052 490,482
--------- --------- ---------
Total stockholders' equity 664,772 601,167 638,839
--------- --------- ---------
TOTAL $ 1,076,974 $ 962,549 $ 1,025,130
========= ========== =========
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Two Quarters Ended
JULY 29, July 30,
1999 1998
--------------------------
--------(Thousands)-------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 32,714 $ 29,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,513 24,239
Deferred income taxes and other 2,211 (1,648)
Restricted stock awards 1,437 1,229
Common stock contribution to benefit plan and
tax benefits credited to stockholders' equity 838 218
Changes in assets and liabilities:
Pharmacy and other receivables (976) 3,137
Merchandise inventories 23,728 31,005
Other current assets (2,409) 857
Current liabilities (6,946) (22,642)
---------- ----------
Net cash provided by operating activities $ 77,110 $ 65,435
========== ==========
INVESTING ACTIVITIES:
Payments for property additions and other assets (51,027) (96,313)
Receipts from property dispositions 11,865 862
---------- ----------
Net cash used in investing activities (39,162) (95,451)
---------- ----------
FINANCING ACTIVITIES:
Dividend payments (10,987) (10,883)
Proceeds from borrowings, net 34,554 12,000
Payments on long-term debt - (260)
Sale (repurchase) of common stock to (from) Profit Sharing Plan 1,020 (3,418)
---------- ----------
Net cash provided by (used in) financing activities 24,587 (2,561)
---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 62,535 (32,577)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 14,976 48,552
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 77,511 $ 15,975
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Assumption of liabilities related to Pacific Northwest acquisition - $ 11,161
</TABLE>
See NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 28, 1999 and Two Quarters Ended July 29, 1999
<TABLE>
<CAPTION>
COMMON STOCK
CONTRIBUTIONS GUARANTEE
COMMON STOCK TO PROFIT OF PROFIT TOTAL
---------------- ADDITIONAL SHARING SHARING RETAINED STOCKHOLDERS'
(Thousands) SHARES AMOUNT CAPITAL PLAN PLAN DEBT EARNINGS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 29, 1998 38,629 $19,315 $110,466 $9,856 ($4,371) $448,877 $584,143
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 63,358 63,358
Dividends ($.56 per share) (21,783) (21,783)
Profit Sharing Plan:
Issuance of stock for FY98 contributions 309 154 9,902 (9,856) 200
Stock portion of FY99 contribution 9,834 9,834
Purchase of stock from plan (105) (52) (3,365) (3,417)
Reduction of plan debt 3,460 3,460
Restricted stock awards, net 113 56 2,597 2,653
Tax benefits related to stock awards 361 361
Tax benefits related to employee stock plans 30 30
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 28, 1999 38,946 $19,473 $119,961 $9,834 ($911) $490,482 $638,839
- ---------------------------------------------------------------------------------------------------------------------------------
UNAUDITED:
Net income 32,714 32,714
Dividends ($.28 per share) (10,987) (10,987)
Profit Sharing Plan:
Issuance of stock for FY99 contributions 268 135 9,699 (9,834) 0
Sale of stock to plan 30 15 1,005 1,020
Reduction of plan debt 911 911
Restricted stock awards, net 52 26 1,411 1,437
Tax benefits related to stock awards 834 834
Tax benefits related to employee stock plans 4 4
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 29, 1999 39,296 $19,649 $132,910 $0 $0 $512,213 $664,772
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Condensed Consolidated Financial Statements include Longs Drug
Stores Corporation (Company) and its wholly-owned subsidiary, Longs Drug
Stores California, Inc. All inter-company accounts and transactions have
been eliminated. The statements have been prepared on a basis consistent
with the accounting policies described in the Annual Report of the
Company previously filed with the Commission on Form 10-K for the year
ended January 28, 1999, and reflect all adjustments and eliminations
which are, in management's opinion, necessary for a fair statement of
the results for the periods. The Condensed Consolidated Financial
Statements for the periods ended July 29, 1999 and July 30, 1998 are
unaudited. The Condensed Consolidated Balance Sheet at January 28, 1999,
and Condensed Consolidated Statement of Stockholders' Equity for the
year then ended, presented herein, have been derived from the audited
consolidated financial statements of the Company included in the Form
10-K for the year ended January 28, 1999.
2. Certain reclassifications have been made to prior year financial
statements in order to conform to current financial statement
presentation.
3. The financial statements have been prepared using the Last-In-First-Out
(LIFO) method of accounting for inventories. The excess of specific cost
inventory over LIFO valuation was $148.0 million at July 29, 1999,
$144.3 million at July 30, 1998, and $146.6 million at January 28, 1999.
A final valuation of inventory under the LIFO method can be made only
after year-end based on ending inventory levels and inflation rates for
the year. Interim LIFO calculations are based on management's estimates
of year-end inventory levels and inflation rates for the year.
4. The Company has an unsecured revolving line of credit of $65.0 million
at prevailing interest rates which expires on August 31, 2002. There
were no borrowings on the line of credit and $10.1 million restricted
for letters of credit at July 29, 1999. The line of credit contains
quarterly and annual financial covenants which require minimum tangible
net worth and various financial ratios. The Company has complied with
restrictions and limitations included in the provisions of the line of
credit.
- 5 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Second quarter sales increased 12.4% to $884.5 million and year-to-date sales
increased 13.9% to $1.75 billion. Pacific Northwest (PNW) stores incremental
nine weeks of sales accounted for 3.0% of total sales growth.
Total same store sales posted a strong 8.7% growth for the second quarter with
pharmacy same store sales increasing 14.3% and front-end same store sales
increasing 5.4%.
Increases in the number of prescriptions filled and industry trend of increase
in the average prescription price contributed to a 17.7% growth in pharmacy
sales for the second quarter. Pharmacy represented 39.3% of total sales in the
second quarter, up from 37.5% in the prior year. Third party as a percentage of
pharmacy sales increased from 84.0% in the prior year quarter to 84.6% of sales
for the second quarter of fiscal 2000.
Front-end sales growth of 9.2% for the second quarter was partly fueled by the
PNW acquisition, which contributed 2.9% of front-end sales growth. Solid
performance in core categories, specifically cosmetics, also contributed to
solid front-end sales growth.
Year-to-date pharmacy sales were up 20.5% with front-end sales up 9.9%.
Year-to-date same store pharmacy sales were up 16.0% and year-to-date same store
front-end sales were up 4.6%.
GROSS MARGINS
Gross profit dollars (including LIFO) increased 10.3% to $232.8 million in the
second quarter. Gross profit percent as a percent of sales decreased to 26.3%
from 26.8% in the prior year. The decrease is primarily due to the continued
decline in pharmacy margins and lower margins from the Pacific Northwest stores
relative to chain averages. Due to lower margins in pharmacy, growth in pharmacy
sales to 39.3% of total sales negatively impacts total gross margin as a percent
of sales.
The Company uses the Last-In First-Out (LIFO) method of inventory valuation. The
LIFO provision was $500,000 for the second quarter compared to $600,000 in the
prior year quarter. Year-to-date the LIFO provision was $900,000 compared to
$5.2 million for the same period last year.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses (excluding net interest) as a percent of
sales dropped 51 basis points, from 23.72% to 23.21% for the second quarter,
benefiting from good leverage on sales increases and cost reduction efforts.
Year-to-date operating and administrative expenses as a percent of sales dropped
53 basis points, from 23.72% to 23.19%.
Included in operating and administrative expenses are costs for the Year 2000
(Y2K) remediation effort. The effort is proceeding according to plan with
$669,000 expensed during the second quarter and $2.1 million year-to-date. Y2K
expenses planned for the remainder of the fiscal year will be approximately
$346,000, bringing the total Y2K project expense to $9.2 million. The Company
plans that systems will be fully remediated and tested by the end of the third
quarter, including end-to-end testing with all of our vendor partners with whom
we exchange information electronically.
INCOME BEFORE TAXES/NET INCOME
Strong sales and reduced operating expenses as a percent of sales resulted in a
9.8% increase in income before taxes for the second quarter. Income before taxes
as a percent of sales were flat to prior year.
- 6 -
<PAGE>
The Company's effective tax rate for the second quarter was 39.3% compared to
39.5% in the second quarter prior year. The decrease in the effective tax rate
was due to the increased business in Washington and Nevada, states without
income tax.
Net income grew 10.2% to $16.4 million for the second quarter. Diluted earnings
per share increased 9.6% to $.42 per share compared to $.38 in the prior year.
Year-to-date net income increased 12.7% to $32.7 million. Year-to-date diluted
earnings per share increased 11.6% to $0.84 per share compared to $0.75 per
share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash provided by operating activities for the two quarters increased $11.7
million compared to prior year primarily due to increased income and inventory
increasing at a lesser rate than sales.
Cash used in investing activities for the two quarters decreased $56.3 million
compared to the prior year primarily due to the acquisition of 20 stores in the
Pacific Northwest last year.
The number of stores in operation increased by five from 373 to 378 since second
quarter last year. The Company expects to open 19 stores in fiscal year 2000,
ending the year with 387 stores, three of which will replace smaller pharmacies
that were purchased when the Company committed to these new communities.
The Company opened four stores during the second quarter, two of which were
replacement stores. The second quarter also reflects the closure of five
additional stores, which were part of an exchange with Rite Aid. The Company
acquired two stores as well as the pharmacy files of six other Rite Aid stores.
In return, Rite Aid received three stores and the pharmacy files of two other
Longs Drug stores. The five stores the Company disposed of were under-performing
the Company's financial goals. The stores the Company received will strengthen
markets in which we are already strong.
Capital expenditures for the year are expected to be between $80 and $85 million
supporting the increase in new stores and continued investment in technology.
At quarter end, the Company had no borrowings outstanding on a $65 million
unsecured revolving line of credit. Drawdowns on this line incur interest at a
LIBOR-based rate.
Expenditures for capital projects, dividends, and stock repurchases are expected
to continue to be funded from operations, cash reserves, and borrowings as
deemed necessary.
YEAR 2000 COMPLIANCE
In 1996 the Company established a Year 2000 Project Team, headed by the
Company's Chief Information Officer, to coordinate the Company's year 2000
efforts. The project team is staffed by the Company's
- 7 -
<PAGE>
Management Information Services (MIS) personnel and outside consultants on an
as-needed basis. The Chief Information Officer reports regularly on the status
of year 2000 to the Company's senior officers, and to the Company's board of
directors.
An assessment of the Company's MIS and non-MIS systems was completed to
determine which mission- critical systems are at risk, and a plan was developed
for replacing and remediating both operating systems and business applications
to achieve year 2000 compliance. The implementation of the plan is underway and
the applications and operating systems are being modified or replaced based on
the level of priority. Management estimates all of the activities with respect
to assessment, clean up, remediation, testing and implementation are about 80%
complete for MIS and about 50% complete for non-MIS systems. The Company
estimates that all critical and non-critical systems and applications will be
year 2000 compliant by October 1999.
Vendor Certification is in progress. First priority testing is given to key
vendors with direct connection switches into Point of Sale and Pharmacy, as well
as all financial settlement vendors. All vendor certification testing is
expected to be completed by October 1999. Although the Company is assessing the
year 2000 status of outside parties, there is no assurance that outside parties
will attain year 2000 compliance on a timely basis; if they do not, year 2000
problems may have a material impact on the Company's operations.
Management believes that, should the Company or any third party with whom the
Company has a business relationship experience a year 2000 related systems
failure, the most likely worst-case scenario would be a possible failure of
third party systems over which the company has no control, such as (but not
limited to) power and telecommunications, supply chain interruption, or
electronic commerce. Such an event could result in a substantial interruption of
business and may have a material impact on the Company's results of operations.
Contingency planning is in process to provide for viable alternatives to ensure
that the Company's core business operations are able to continue in the event of
a year 2000 related systems failure. Comprehensive contingency plans have been
developed to mitigate risks.
At the request of the board of directors, an external consulting group conducted
independent reviews of the Company's year 2000 efforts. Three year 2000 project
assessments were conducted--the first in September 1998, the second in March
1999 and the third in July 1999. The results and recommendations were reviewed
and addressed.
The Company expensed $669,000 for year 2000 efforts in the second quarter and
$2.1 million year-to-date. The Company estimates it will incur an additional
$346,000, bringing the total year 2000 project cost to $9.2 million, which
includes the estimated costs of all modifications, testing and consulting fees.
The foregoing discussion of year 2000 compliance contains forward looking
statements about the Company's plans, expectations, costs, and consequences
regarding year 2000 matters. There can be no assurance that the Company's
expectations can be met and that the Company will not be adversely affected in a
way unidentified in the preceding discussion. Factors that could cause the
Company's results to differ from expectations include (but not limited to)
unforeseen problems, greater than anticipated costs, and unexpected difficulties
with outside parties.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements regarding the Company's
expected performance for future periods including same store sales and new store
openings. Actual results for such periods may materially differ. Such
forward-looking statements involve risks and uncertainties, including risks for
changing market conditions in the overall economy and the retail industry,
consumer demand, the opening of new stores, actual advertising expenditures by
the Company, the success of the Company's advertising and merchandising strategy
and other factors detailed from time to time in the Company's annual and other
reports filed with the Securities and Exchange Commission.
- 8 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 18, 1999, the Annual Meeting of Shareholders of the
Company was held in Walnut Creek, California.
(b) The following directors were elected:
<TABLE>
<CAPTION>
Votes in Favor Votes Withheld
---------------- ----------------
<S> <C> <C>
R. M. Brooks 36,310,572 867,291
W. L. Chenevich 36,293,690 884,173
W. G. Combs 36,315,175 862,688
D. L. Sorby, Ph.D. 36,309,090 868,773
</TABLE>
There were no abstentions and no broker non-votes.
(c) Other directors whose term of office as a director continued
after the Annual Meeting:
E. E. Johnston G. H. Saito
R. M. Long H. R. Somerset
M. S. Metz T. R. Sweeney
R. A. Plomgren F. E. Trotter
S. D. Roath
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There have been no reports on Form 8-K filed during the
quarter ended July 29, 1999.
- 9 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LONGS DRUG STORES CORPORATION
----------------------------------------
(REGISTRANT)
Date September 13, 1999 /s/ G. L. White
------------------------ ----------------------------------------
G. L. White
Vice President, Controller
(Principal Accounting Officer)
/s/ R. A. Plomgren
----------------------------------------
R. A. Plomgren
Senior Vice President, Development
(Chief Financial Officer)
- 10 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-27-2000
<PERIOD-START> JAN-29-1999
<PERIOD-END> JUL-29-1999
<CASH> 77,511
<SECURITIES> 0
<RECEIVABLES> 69,048
<ALLOWANCES> 0
<INVENTORY> 358,520
<CURRENT-ASSETS> 531,723
<PP&E> 841,862
<DEPRECIATION> 357,716
<TOTAL-ASSETS> 1,076,974
<CURRENT-LIABILITIES> 323,292
<BONDS> 0
0
0
<COMMON> 19,649
<OTHER-SE> 645,123
<TOTAL-LIABILITY-AND-EQUITY> 1,076,974
<SALES> 1,753,948
<TOTAL-REVENUES> 0
<CGS> 1,292,684
<TOTAL-COSTS> 1,700,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,825
<INCOME-PRETAX> 53,614
<INCOME-TAX> 20,900
<INCOME-CONTINUING> 32,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,714
<EPS-BASIC> .84
<EPS-DILUTED> .84
</TABLE>
