<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 28, 1999
/ / 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
- ---------------------------------------- -------------------
(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
- ---------------------------------------- -------------------
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
----- -----
The Exhibit Index is located on page 4 of this form.
<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 6, 1999, was
approximately $1,202,514,666.
There were 39,265,785 shares of common stock outstanding as of April 6, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The Longs Drug Stores Corporation Annual Report to Shareholders for the year
ended January 28, 1999, (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 16, 1999, as filed with the
Commission on April 15, 1999, involving the election of directors, has been
incorporated by reference into Part III, Items 10, 11, 12, and 13.
<PAGE>
PART I
ITEM 1. BUSINESS
Longs Drug Stores, founded in 1938 in Oakland, California, is the sixth
largest drug store chain in North America, ending the year with 381 stores in
California, Colorado, Hawaii, Nevada, Washington and Oregon.
Pharmacy is the cornerstone of Longs' business, accounting for about 37% 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 medications, 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 along with private label
merchandise that provides extra value to customers.
Longs competes in the retail drug industry with local and national chains as
well as with independent merchants. Similar merchandise 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 15-18), "Significant Accounting Policies" and "Employee Compensation
and Benefits" (PAGES 23-25).
ITEM 2. PROPERTIES
As of January 28, 1999, Longs operates 381 stores; 307 in California, 32 in
Hawaii, 14 in Nevada, 8 in Colorado, 18 in Washington, and 2 in Oregon. Our
stores vary in size, with the majority ranging from 15,000 to 28,000 square
feet, approximately 68% of which is devoted to selling space. The average
size of the stores opened this past fiscal year is 23,000 square feet. The 2
corporate offices, 2 warehouses, and 128 of our stores are Company-owned
buildings on Company-owned land; 47 stores are Company-owned buildings on
leased land; and 206 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 described in the Annual Report under the heading "Contingent Liabilities"
(PAGE 26), a purported class action has been filed against Longs on behalf of
certain management-level employees: department managers, senior department
managers, assistant managers, and second assistant managers. The lawsuit was
filed in the United States District Court for the Northern District of
California on March 10, 1999. Plaintiffs allege that Longs violated the
Federal Labor Standards Act ("FLSA") and state law (of California, Colorado,
Nevada, Hawaii, Oregon, and Washington) by classifying these employees as
exempt and failing to pay them the overtime premium required for non-exempt
employees at one and one-half times their regular rate. The lawsuit also
claims that Longs violated ERISA by failing to maintain adequate records, and
that the alleged failure to pay overtime and keep adequate records
constitutes an unfair business practice, in violation of Section 17200 of the
California Business and Professions Code. Plaintiffs seek damages and
penalties in unspecified amounts, injunctive and declaratory relief, and
costs of litigation, including attorney fees. The Company will defend itself
vigorously. At this time it is not known what financial impact 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.
<PAGE>
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 60 Chairman of the Board and 1991
Chief Executive Officer(3) 1977
S. D. Roath 57 President(3) 1991
B. M. Brandon 60 Senior Vice President and Regional Manager 1988
T. D. Burnside 50 Senior Vice President -- Marketing 1998
D. J. Fong 50 Senior Vice President -- Pharmacy 1995
O. D. Jones 60 Senior Vice President -- Properties 1987
and Secretary 1976
B. E. Kilcourse 47 Senior Vice President and Chief Information Officer 1997
R. E. Lovelady 52 Senior Vice President -- Human Resources 1997
R. A. Plomgren 64 Senior Vice President -- Development 1976
and Chief Financial Officer(3) 1995
G. H. Saito 54 Senior Vice President and Hawaii District Manager(3) 1995
D. R. Wilson 57 Senior Vice President and 1988
Regional Manager 1997
G. L. White 58 Vice President, Controller, and Assistant Secretary 1988
C. E. Selland 42 Vice President, Treasurer, and Assistant Secretary 1994
</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.
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 6, 1999, was 15,472. The additional information required by this item is
contained in the Annual Report under the headings "Statements of Consolidated
Stockholders' Equity" (PAGE 22), "Stockholders' Equity" (PAGE 27), and
"Quarterly Financial Data (Unaudited)" (PAGE 28). 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 "Five Year Selected Financial Data" (PAGE 14). 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 15-18). Such information
is hereby incorporated by reference and filed herewith.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Information required by this item is contained in the Annual Report under the
heading "Management's Discussion and Analysis" (PAGE 17). Such information is
hereby required by reference and filed herewith.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is contained in the Annual Report (PAGES
19-28). 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 16, 1999, as filed with the Securities
and Exchange Commission on April 15, 1999. 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 16, 1999,
as filed with the Commission on April 15, 1999, and is hereby incorporated by
reference.
Items 11, 12, and 13 are omitted since the Company filed on April 15, 1999, with
the Securities and Exchange Commission a definitive proxy statement dated April
16, 1999, involving the election of directors, for the Annual Meeting on May 18,
1999. Such information is hereby incorporated by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and independent auditors' report
appearing in the Annual Report on pages 19 through 28 are incorporated
herein by reference:
Independent Auditors' Report.
Statements of Consolidated Income for the fiscal years ended
January 28, 1999, January 29, 1998, and January 30, 1997.
Consolidated Balance Sheets as of January 28, 1999, and January
29, 1998.
Statements of Consolidated Cash Flows for the fiscal years
ended January 28, 1999, January 29, 1998, and January 30,
1997.
Statements of Consolidated Stockholders' Equity for the fiscal
years ended January 28, 1999, January 29, 1998, and January 30,
1997.
Notes to Consolidated Financial Statements.
(a)(2) Not applicable.
(a)(3) EXHIBITS
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 1 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.
<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. 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 28, 1999.
<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)
April 16, 1999 /s/ G. L. White
Date --------------------------- ---------------------------------------
(G. L. White)
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
April 16, 1999 /s/ R. A. Plomgren
Date --------------------------- ---------------------------------------
(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
April 16, 1999 /s/ R. M. Long
------------------------- By -----------------------------------
(R. M. Long)
Chairman of the Board
Chief Executive Officer and
Director
April 16, 1999 /s/ S. D. Roath
------------------------- By -----------------------------------
(S. D. Roath)
President and Director
Date Signature
<PAGE>
April 16, 1999 /s/ R. M. Brooks
------------------------- By -----------------------------------
(R. M. Brooks)
Director
April 16, 1999 /s/ W. G. Combs
------------------------- By -----------------------------------
(W. G. Combs)
Retired Vice President and
Director
April 16, 1999 /s/ E. E. Johnston
------------------------- By -----------------------------------
(E. E. Johnston)
Director
April 16, 1999 /s/ M. S. Metz
------------------------- By -----------------------------------
(M. S. Metz, Ph.D.)
Director
April 16, 1999 /s/ G. H. Saito
------------------------- By -----------------------------------
(G. H. Saito)
Director
April 16, 1999 /s/ H. R. Somerset
------------------------- By -----------------------------------
(H. R. Somerset)
Director
April 16, 1999 /s/ D. L. Sorby
------------------------- By -----------------------------------
(D. L. Sorby, Ph.D.)
Director
April 16, 1999 /s/ T. R. Sweeney
------------------------- By -----------------------------------
(T. R. Sweeney)
Director
April 16, 1999 /s/ F. E. Trotter
------------------------- By -----------------------------------
(F. E. Trotter)
Director
<PAGE>
LONGS DRUGS
ANNUAL REPORT 1999
[PHOTO]
Longs has it all!
<PAGE>
PROFILE Longs Drug Stores is one of the largest drug store chains in North
America, ending the year with 381 stores in California, Hawaii, Washington,
Oregon, Nevada and Colorado. The Company offers a uniquely broad assortment
of merchandise -- including pharmaceutical products, health and beauty items,
photographic supplies and processing, staple foods 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.
[GRAPHIC] -----------------------------------------
COMPANY-OWNED
PROPERTIES AT FISCAL YEAR END
Store Building and Land 128
Store Building on Leased Land 47
Corporate Offices 2
Warehouses 2
-----------------------------------------
NUMBER OF STORES
AT FISCAL YEAR END
California 307
Hawaii 32
Nevada 14
Colorado 8
Washington 18
Oregon 2
-----------------------------------------
Total 381
-----------------------------------------
<PAGE>
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FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
(Millions except sales per square foot, per share data and number of stores)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 28, January 29, January 30,
- -------------------------------------------------------------------------------------------------
Fiscal Year Ended 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $3,267 $2,953 $2,828
Net Income $ 63 $ 58 $ 59
Per Share Data (Diluted)
Net Income $ 1.64 $ 1.49 $ 1.50
Dividends $ .56 $ .56 $ .56
Balance Sheet Data
Total Assets $1,025 $ 946 $ 880
Stockholders' Equity $ 639 $ 584 $ 554
Key Financial Ratio
Return on Average Stockholders' Equity 10.4% 10.2% 10.9%
Store Data
Number of Stores at Year End 381 349 337
Selling Square Footage at Year End 6.0 5.5 5.4
Sales Per Selling Square Foot (52-week basis) $ 543 $ 537 $ 518
- -------------------------------------------------------------------------------------------------
</TABLE>
1 Longs Drug Stores Annual Report 1999
<PAGE>
TO OUR
STOCKHOLDERS
Longs had a very successful and productive year in fiscal 1999 marked by
solid sales and earnings growth, continued improvements in efficiency
throughout the Company, and an exciting and promising expansion of our market
presence in the Western United States. Clearly, the strategic steps we
implemented several years ago have been effective, enabling Longs to thrive
in an increasingly competitive retail market. Faced with recent challenges
from supermarkets, warehouse/club operators, and current retail drug
competitors trying to capture new customers and increased market share, Longs
has more than held its own. The key to this success, we believe, is our
combination of proven tradition and strategic innovation. We not only provide
the high levels of service and unique product selection that have been our
hallmark since 1938, we also apply cutting-edge technology tools to sharpen
all aspects of our operations, from distribution to pharmacy information
systems to store-level marketing. The result: success in some of the toughest
retail markets in the United States and a strong foundation for sustained
growth.
For the 52 weeks ended January 28, 1999, Longs sales increased 10.6% to $3.27
billion, and same store sales rose 7.2% from a year ago. Net income was $63.4
million, or $1.64 per share, up 9.8%. Several factors combined to drive our
profit growth. We achieved higher gross margin on front-end sales through
sharper pricing and
2 Longs Drug Stores Annual Report 1999
<PAGE>
purchasing and increased sales of higher margin products. We continued to
reduce our inventory costs in all categories. And we saw a 19.5% increase in
pharmacy sales coupled with higher per-prescription profitability this
despite the declines in reimbursements and overall pharmacy margins facing
all drug retailers in the era of managed care. Pharmacy sales were 36.8% of
total sales in fiscal 1999, up from 34.1% a year ago.
Strong Performance in All Departments
Longs' strong top line performance in fiscal 1999, especially same store
sales growth, reflect solid execution in both our pharmacy and front-end
business. The front-end category management initiatives that we began rolling
out two years ago continue to pay off and we believe much of this success is
due to the unique way we implement this merchandising tool. Like many
retailers, we analyze scanner-based sales data to optimize product selection,
pricing, replenishment and even shelf placement. But unlike our competitors,
we do not view category management as purely a data-driven exercise. We
augment the process with human insight by giving our store managers a great
deal of autonomy in how they apply category management analysis in their
stores. This is a critical differentiator for Longs. It is why our stores do
not have an institutional, cookie cutter feel, but rather the more personal
atmosphere that reflects each neighborhood and community we serve. It is a
major reason why we have annual per store sales exceeding $8.8 million and
customers that are among the most loyal in our industry.
[CHART] [CHART] [CHART]
Longs Drug Stores Annual Report 1999 3
<PAGE>
We are equally proud of our pharmacy performance. The increasing influence of
managed care and increased pricing pressures have made this an especially
challenging business in recent years, but we have successfully offset
declining margins through higher sales and improved efficiency. For example,
through Rx America, our pharmacy benefits management joint venture with
American Stores Corporation, we have continued our emphasis on patient care
initiatives and cover more than 3 million lives. To increase operating
efficiency we have recently shifted to Bergen Brunswig as a single source
wholesaler for prescription drugs, over-the-counter, and other health and
beauty products. And, as we have described in previous annual reports, our
advanced technology tools are improving prescription filling, minimizing
overhead, and enhancing inventory management in the Pharmacy.
Indeed, our control of both pharmacy and front-end inventory has been
steadily improving. Through better tracking, forecasting and replenishment,
in fiscal 1999 we reduced average pharmacy inventory by $10,000 from a year
earlier. This was a significant accomplishment in a year of rising sales, and
we look forward to further improvements at both the warehouse and store level.
Growing Presence in Western Markets
In fiscal 1999 we took a large step toward extending our leadership in the
Western United States with the acquisition of Western Drug Distributors, a
highly regarded 20-store chain in Washington and Oregon. The Pacific
Northwest is a natural market for Longs, being adjacent to our home state of
California and having similar customer
4 Longs Drug Stores Annual Report 1999
<PAGE>
demographics and market dynamics. We also feel the growth potential in the
Pacific Northwest is excellent since there is no dominant drug retailer, and
certainly no competitor with our unique product offering or service-driven
business model.
Going forward, our plans are to continue our expansion in Washington and
Oregon, as well as in Colorado and Nevada where we have been increasing our
presence in recent years. In each of these four states our new store growth
will be rational to ensure that every store we operate in every market we
serve provides the same high degree of service and quality that is the heart
of the Longs brand and source of our strong customer loyalty in California
and Hawaii. Of our planned 16 new stores in fiscal 2000, a number will be in
Colorado and the Pacific Northwest with some in-filling in California, where
economic and population growth continue to create opportunities for new
stores.
Continuing Momentum in 2000 and Beyond
We firmly believe that Longs can and will build further on the positive
momentum we have established, and the reason for our optimism goes beyond
category management, advanced technology tools, our growing geographic
presence, and our unsurpassed reputation for selection and service. The most
compelling reason for our confidence in Longs' future is our people, the more
than 18,500 employees of Longs who make each of our 381 stores the best drug
store in town every day. As always, we thank them for their ongoing
contributions to the Company's success.
/s/ Steve Roath /s/ Bob Long
S.D. Roath, President R.M. Long, Chief executive Officer
[PHOTO] [PHOTO]
April 5, 1999
Longs Drug Stores Annual Report 1999 5
<PAGE>
DID
YOU FIND
WHAT YOU WERE
LOOKING FOR
TODAY?
[PHOTO]
UNSURPASSED CUSTOMER SERVICE.
Longs first made its name pioneering self serve pharmacies in California in
1938, an innovation that gave customers ready access to a broad choice of
products and let them quickly compare brands and prices at a glance. Our
reasoning was simple -- have what the customer is looking for and make
shopping as easy as possible -- and that philosophy remains at the heart of
how we do business. We have more and better trained sales people on the floor
than you'll find in our competitors' stores, and pharmacy technology
enhancements have freed our pharmacists to spend more time consulting with
customers. Store design, too, makes the shopping experience more enjoyable
and more productive, and we continually revise and improve our floor plans to
reflect how our customers shop and to ensure that they find what they want,
where they want it every time they visit Longs.
6 Longs Drug Stores Annual Report 1999
<PAGE>
[PHOTO]
Longs Drug Stores Annual Report 1999 7
<PAGE>
[PHOTO]
8 Longs Drug Stores Annual Report 1999
<PAGE>
THIS PLACE HAS EVERYTHING!
[PHOTO]
UNIQUE PRODUCT SELECTION.
Longs has redefined what a drug store is by expanding beyond traditional
prescription drugs and health care offerings to provide a broad selection of
cosmetics and beauty supplies, Hallmark greeting cards, photo processing and
supplies, and basic foods. It's a truly unique merchandise assortment and one
that continues to evolve in response to our customers. We are giving
customers what they want with additions, updates and enhancements to every
department. We also strive to ensure that our customers find more than they
expect. Our managers are encouraged to make their stores reflect local
customer tastes with out-of-the-ordinary products ranging from designer
neckties to fishing tackle to model trains. And Longs offers a regularly
changing selection of special purchase items in Bargain Alley, one of the
most popular features in our stores. Expecting the unexpected gives our
customers another reason to keep coming back and helps sustain Longs'
enduring customer loyalty.
Longs Drug Stores Annual Report 1999 9
<PAGE>
LONGS
IS MORE
THAN A STORE...
THEY'RE
A NEIGHBOR.
[PHOTO]
STRONG COMMUNITY TIES.
Longs' deep sense of community involvement that defined the first
neighborhood drug store is evident in each of our 381 stores today. Unlike
most large chains, we give our managers a great deal of operating autonomy,
which gives each store unique attributes, and makes it a member of the
surrounding community rather than just a generic outpost of a large retailer.
Perhaps the most telling example of this local orientation is the involvement
of our store personnel in local activities, charities and organizations. From
support of the Juvenile Diabetes Walk-a-thon to health screenings and flu
shots to responding to local disasters -- such as Hawaii's Hurricane Iniki in
1992 or the Loma Prieta earthquake in 1989 -- our people demonstrate a
commitment to their surrounding communities that is the true test of any good
neighbor.
10 Longs Drug Stores Annual Report 1999
<PAGE>
[PHOTO]
Longs Drug Stores Annual Report 1999 11
<PAGE>
[PHOTO]
12 Longs Drug Stores Annual Report 1999
<PAGE>
LONGS
IS LIKE OUR
EXTENDED
FAMILY.
[PHOTO]
EXPERIENCED, COMMITTED EMPLOYEES.
The most deeply rooted of Longs' core values is the importance we place on --
and value we attribute to -- our employees. We have been a family-run company
since we opened in 1938, and that family feeling runs deep, manifesting
itself in the friendly atmosphere of our stores and the efficient teamwork we
practice throughout the organization. It's an attitude that makes working at
Longs more than a job. In an era where frequent job changing is the norm, we
have more than 3,750 employees who have been with Longs over 10 years. And
our employees own 20% of the stock in the Company. Roots run deep at Longs.
The insight and experience that result from such stability are a big reason
why we have been able to successfully combine tradition and innovation for
the past 60 years. Having high quality employees is why we will continue to
succeed for at least 60 more.
Longs Drug Stores Annual Report 1999 13
<PAGE>
FINANCIALS
Five Year Selected Financial Data 14
Management's Discussion and Analysis 15
Statements of Consolidated Income 19
Consolidated Balance Sheets 20
Statements of Consolidated Cash Flows 21
Statements of Consolidated Stockholders' Equity 22
Notes to Consolidated Financial Statements 23
Auditor's Opinion 28
- -------------------------------------------------------------------------------
Five Year Selected Financial Data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
FISCAL (THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $3,266,904 $2,952,921 $2,828,338 $2,644,376 $2,558,269
Net Income 63,358 57,726 58,612 46,228(1) 48,731
Net Income per Diluted Share 1.64 1.49 1.50 1.15(1) 1.18
Dividends per Share .56 .56 .56 .56 .56
Total Assets 1,025,130 946,289 879,649 853,557 827,961
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $14 million lawsuit settlement in fiscal year 1996, reducing the
after-tax net income by $8.4 million, or $.21 per share.
14 Longs Drug Stores Annual Report 1999
<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
with front-end sales benefiting from the Thanksgiving and Christmas holidays
and pharmacy sales and over-the-counter medications (front-end sales)
benefiting from 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 comparisons for fiscal 1997 have
also been presented on a 52-week basis to facilitate comparison to the 1999
and 1998 fiscal years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Sales
- ---------------------------------------------------------------------
Fiscal 1999 1998 1997
- ---------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Sales $3,266,904 $2,952,921 $2,828,338
Sales Growth 10.6% 4.4% 7.0%
Sales--52 Week
Comparable Basis $3,266,904 $2,952,921 $2,775,094
Same-Store Sales Growth 7.2% 4.6% 4.1%
New Stores/Closed Stores 3.4% 1.8% 0.8%
---------- ---------- ----------
Sales Growth--52 Week
Comparable Basis 10.6% 6.4% 4.9%
---------- ---------- ----------
New Stores 16 14 10
Closed Stores (4) (2) (1)
Pacific Northwest acquisition 20 -- --
---------- ---------- ----------
Number of Stores 381 349 337
- ---------------------------------------------------------------------
</TABLE>
Sales increased 10.6% in fiscal 1999 and 4.4% (6.4% on a 52 week comparable
basis) in fiscal 1998. Sales growth is attributed to increased same store and
new store sales and growth in new markets, including the acquisition of 18
stores in Washington and 2 stores in Oregon from Western Drug Distributors, a
franchise of Drug Emporium (Pacific Northwest acquisition). Incremental sales
from this acquisition contributed 3.0% of total sales growth in fiscal 1999.
Solid same-store sales growth of 7.2% benefited from 15.9% same-store
pharmacy sales and 2.7% same-store front-end sales. During fiscal 1999, 16
new stores were opened, 9 of which were opened in the fourth quarter.
Pharmacy Sales
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -----------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks)
<S> <C> <C> <C>
Pharmacy Sales Growth--
52 Week Basis 19.5% 11.0% 9.0%
Same-Store Pharmacy
Sales Growth 15.9% 10.0% 10.5%
Pharmacy as a % of Total Sales 36.8% 34.1% 33.1%
Managed Care as a % of
Pharmacy Sales 84.1% 82.1% 80.2%
- -----------------------------------------------------------------------------------
</TABLE>
Pharmacy sales, for the second consecutive year, posted double-digit growth
led by increases in the number of prescriptions filled and new drug
introductions that contributed to an increased average prescription price.
These factors are responsible for same-store pharmacy sales growth of 15.9%.
Pharmacy sales as a percentage of total sales grew to 36.8%. Pharmacy sales
reimbursed through managed care arrangements (third party sales) were 84.1%
and continue to increase as a percentage of pharmacy sales. Average pharmacy
sales per store are among the leaders in the drug store industry. The
percentage of pharmacy sales to total sales on the surface appears to lag the
industry but only because of Longs strength in the front-end core categories.
Front-End Sales
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -----------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Front-End Sales Growth--
52 Week Basis 7.3% 3.8% 3.1%
Same Store Front-End
Sales Growth 2.7% 1.9% 4.0%
Front-End as a % of Total Sales 63.2% 65.9% 66.9%
- -----------------------------------------------------------------------------------
</TABLE>
Longs percentage of front-end sales relative to total sales leads the
industry due to the relatively large store format and strong sales in core
categories of over-the-counter medications, cosmetics, photo and photo
processing, and greeting cards. Front-end sales growth of 7.3% in fiscal 1999
was led by a 3.2% contribution from the Pacific Northwest acquisition.
Successful category management drove higher than average sales increases in
relatively high margin core categories of cosmetics, over-the-counter
medications and photo, as well as the additional contribution from more
in-store photo labs and mailing centers.
Longs Drug Stores Annual Report 1999 15
<PAGE>
- -----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
Gross Margin
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Margin %
Last-in-first-out (LIFO) 26.6% 26.6% 26.7%
Gross Margin %
First-in-first-out (FIFO) 26.8% 26.8% 26.8%
LIFO Provision $7,500 $5,900 $3,400
- -------------------------------------------------------------------------------------
</TABLE>
Gross margin as a percent of sales (LIFO and FIFO) was flat in relation to
prior year. Category management pricing and other marketing initiatives
improved front-end margins and offset declines in pharmacy percentage margins
and the impact of lower overall margins in the new Pacific Northwest stores.
The LIFO provision fluctuates with inflation rates and year-end inventory
mix, and is included in cost of merchandise sold. Increases in the LIFO
provision for the last two fiscal years were primarily caused by the increase
in prescription drug costs.
Operating and Administrative Expenses
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating and Administrative
Expenses $765,058 $690,552 $657,796
Operating and Administrative
Expenses as a Percent of Sales 23.42% 23.39% 23.26%
Year 2000 Project Expenses $5,463 $1,282 --
Operating and Administrative
Expenses as a Percent of Sales
(Excluding Y2K expenses) 23.25% 23.34% 23.26%
- -------------------------------------------------------------------------------------
</TABLE>
In fiscal 1999, operating and administrative expenses as a percent of sales
were flat to prior year at 23.4%, despite absorbing $5.5 million of Year 2000
expenses (0.17% of sales).
Interest Expense--In fiscal 1999 and 1998, the Company incurred interest
expense on short-term bank borrowings of $1.8 million and $1.5 million,
respectively. These borrowings were used to finance the Company's operations,
to acquire the 20 stores in the Pacific Northwest and to invest in new
stores, distribution facilities and technology.
Income Taxes--The Company's effective income tax rates were 38.5% in fiscal
1999, 39.3% in fiscal 1998 and 39.9% in fiscal 1997. The Company benefited in
fiscal 1999 from a new California law retroactively reinstating the
deductibility of dividends paid on shares held by the Profit Sharing Plan
which reduced the effective tax rate by 0.23%. Also, a decrease in the
effective tax rate resulted from the increased business in Washington and
Nevada, which have no state income tax. It is anticipated that the Company's
effective tax rate will be approximately 39.7% for fiscal 2000.
Net Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $63,358 $57,726 $58,612
Net Income as a Percent of Sales 1.94% 1.96% 2.07%
Net Income as a Percent of Sales
(Excluding Y2K) 2.04% 1.98% 2.07%
- -------------------------------------------------------------------------------------
</TABLE>
Net income grew 9.8% for fiscal 1999 and is in line with the 10.6% increase
in sales. Net income as a percent of sales decreased slightly versus fiscal
1998 primarily due to $5.5 million in Year 2000 expenses in fiscal 1999
versus $1.3 million in fiscal 1998. Without the Year 2000 expenses included
in Operating and Administrative expenses, net income as a percentage of sales
would have been 2.04% in fiscal 1999 and 1.98% in fiscal 1998.
Net Income per Share (Diluted)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income per share $ 1.64 $ 1.49 $ 1.50
Percent increase (decrease)
in Net Income per Share 10.1% (0.7%) 30.4%
- -------------------------------------------------------------------------------------
</TABLE>
Net income per share benefited in fiscal 1998 and 1997 by stock repurchases
in those years.
The decrease in net income per share for fiscal 1998 was primarily impacted
by a comparison to fiscal 1997 that included one additional week of
operations. The increase in net income per share for fiscal 1997 was also due
to the additional week of operations in fiscal 1997 compared to fiscal 1996.
16 Longs Drug Stores Annual Report 1999
<PAGE>
- -----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash Position
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Equivalents at
Fiscal Year End $14,976 $48,552 $22,834
- -------------------------------------------------------------------------------------
</TABLE>
Cash and equivalents in fiscal 1999 decreased due to the costs and working
capital related to the Pacific Northwest acquisition and the opening of 16
new stores. Cash and equivalents in fiscal 1998 were higher than fiscal 1997
due to strong sales growth and decreased inventories.
Cash from Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by
Operating Activities $115,014 $135,620 $80,579
- -------------------------------------------------------------------------------------
</TABLE>
Cash provided by operating activities in fiscal 1999 decreased due to
increased investment in inventories related to 16 new stores and the timing
of income tax payments. Fiscal 1998 cash provided by operating activities
increased primarily due to higher customer receipts driven by strong sales
growth and the Company's focus on reducing average inventory per store.
Investing Activities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- -------------------------------------------------------------------------------------
(Thousands) (52 Weeks) (52 Weeks) (53 Weeks)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash used in Investing Activities ($133,424) ($67,507) ($65,117)
- -------------------------------------------------------------------------------------
</TABLE>
Capital expenditures increased in fiscal 1999 primarily due to the Pacific
Northwest acquisition, 16 new stores, technology, in-store photo labs and the
completion of the Northern California warehouse.
Capital expenditures for fiscal 2000 are expected to be between $70 and $80
million with investments in new stores and technology.
Financing Activities
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Fiscal 1999 1998 1997
- ---------------------------------------------------------------------------------------
Thousands (52 Weeks) (52 Weeks) (53 Weeks)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash used in Financing Activities ($15,166) ($42,395) ($41,942)
- ---------------------------------------------------------------------------------------
</TABLE>
Cash flow used in fiscal 1999 financing activities was $15.2 million, a
decrease of $27.2 million. Stock repurchases (net of sales) for fiscal 1999
were $3.4 million, down from $20.5 million and $19.9 million in fiscal 1998
and 1997, respectively. These repurchases are made at the discretion of the
Board of Directors and are affected 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. At the end of fiscal
1999, the Company had $10 million in outstanding debt at a rate of 5.28% and
$55 million of credit available for use. There was $663,000 restricted for
letters of credit at the end of fiscal 1999.
Subsequent to year-end, the Company completed a private placement financing
in which $45 million in senior notes were issued. The debt consisted of $15
million of 5.85% notes due in 2006 and $30 million of 6.19% notes due in
2014. The proceeds from these notes will be used to repay outstanding
short-term borrowings and for general corporate purposes.
Expenditures for capital projects, dividends, and stock repurchases have
been, and are expected to continue to be, funded from operations, cash
reserves and the aforementioned private placement. To maintain desired
working capital, the Company may periodically use the short-term line of
credit.
Market Risk
The Company does not undertake any specific actions to cover its exposure to
interest rate risk, and the Company is not a party to any interest rate risk
management transactions.
The Company does not purchase or hold any derivative financial instruments.
A 55 basis point move in interest rates (10% of the Company's weighted
average interest rate) affecting the Company's floating financial instruments
would have an immaterial effect on the Company's pretax income and cash flow
over the next year. The 55 basis point move in interest rates would also have
an immaterial effect on the fair value of the Company's fixed rate financial
instruments.
Longs Drug Stores Annual Report 1999 17
<PAGE>
- -----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
YEAR 2000 COMPLIANCE
Historically, computer systems have maintained two-digit year information in
date fields; 98, for example, has meant 1998. With the year 2000 approaching,
some systems will be unable to process dates correctly. Processes may abort
or produce erroneous data. Systems that require the use of dates beyond 1999
will run into this problem before 2000.
The problem can be found almost anywhere, in both hardware and software.
Mainframe systems, mid-range systems, and personal computers can all be a
source of trouble. So can elevators, point-of-sale systems, PBX's, and other
devices operating with embedded microcomputer chips that many people don't
think of as being computers. If a company's systems cannot interpret the
year 2000 dates beyond 1999, some modification or replacement of the systems
is necessary to avoid system failures and the temporary inability to process
transactions or engage in the normal business activities.
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 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 60% 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 June 30, 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 July 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 could 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. Management expects to have
a comprehensive contingency plan developed by June 30, 1999 and implemented
by October 31, 1999.
At the request of the board of directors, an external consulting group
conducts independent reviews of the Company's year 2000 efforts. A review was
conducted in September 1998 and the recommendations were implemented. A
second assessment was conducted at the beginning of March 1999. The results
are under review and recommendations will be addressed.
In fiscal 1999 and 1998, the Company addressed year 2000 compliance issues
with expenditures of $5.5 million and $1.3 million, respectively. The Company
estimates that it will incur an additional $2.5 million in fiscal 2000,
totalling approximately $9.3 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.
18 Longs Drug Stores Annual Report 1999
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
January 28, January 29, January 30,
- --------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Thousands Except Per Share (52 weeks) (52 weeks) (53 weeks)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales: $3,266,904 $2,952,921 $2,828,338
Cost and expenses:
Cost of merchandise sold 2,397,644 2,166,744 2,074,084
Operating and administrative 764,415 689,677 655,903
Interest expense 1,787 1,474 839
----------- ----------- ----------
Income before taxes on income 103,058 95,026 97,512
Taxes on income 39,700 37,300 38,900
----------- ----------- ----------
Net income $ 63,358 $ 57,726 $ 58,612
----------- ----------- ----------
----------- ----------- ----------
Per common share:
Net income:
Basic $ 1.64 $ 1.50 $ 1.50
Diluted $ 1.64 $ 1.49 $ 1.50
Dividends $ .56 $ .56 $ .56
Weighted average number of shares outstanding:
Basic 38,527 38,590 38,987
Diluted 38,717 38,764 39,141
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Longs Drug Stores Annual Report 1999 19
<PAGE>
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
January 28, January 29,
For the Fiscal Years Ended (thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 14,976 $ 48,552
Pharmacy and other receivables 68,072 63,107
Merchandise inventories 382,248 345,082
Deferred income taxes 25,388 23,244
Other 1,844 1,337
---------- ---------
Total current assets 492,528 481,322
---------- ---------
Property:
Land 95,359 90,428
Buildings and leasehold improvements 392,967 361,635
Equipment and fixtures 321,998 287,675
Beverage licenses 7,569 7,468
---------- ---------
Total property at cost 817,893 747,206
Less accumulated depreciation 345,995 312,112
---------- ---------
Property net 471,898 435,094
---------- ---------
Goodwill and other assets 60,704 29,873
---------- ---------
Total $1,025,130 $946,289
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 184,989 $ 170,855
Short-term borrowings 10,000
Employee compensation and benefits 72,353 63,300
Taxes payable 43,700 46,079
Current portion of long term debt and guarantee
of Profit Sharing Plan debt 1,758 3,210
Other 26,183 29,325
---------- ----------
Total current liabilities 338,983 312,769
---------- ----------
Guarantee of Profit Sharing Plan debt 1,803
Long term debt 14,253 14,219
Deferred income taxes and other long term liabilities 33,055 33,355
---------- ----------
Stockholders' equity:
Common stock (38,946,000 and 38,629,000 shares outstanding) 19,473 19,315
Additional capital 119,961 110,466
Common stock contribution to Profit Sharing Plan 9,834 9,856
Guarantee of Profit Sharing Plan debt (911) (4,371)
Retained earnings 490,482 448,877
----------- ----------
Total stockholders' equity 638,839 584,143
----------- ----------
Total $ 1,025,130 $ 946,289
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
20 Longs Drug Stores Annual Report 1999
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
January 28, January 29, January 30,
For the Fiscal Years Ended 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Thousands (52 weeks) (52 weeks) (53 weeks)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 63,358 $ 57,726 $ 58,612
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 51,288 45,243 43,873
Deferred income taxes and other (2,084) (9,186) 4,468
Restricted stock awards 2,653 2,065 1,669
Common stock contribution to benefit plans 10,034 9,856 9,460
Tax benefits credited to stockholders' equity 30 61 90
Changes in assets and liabilities:
Pharmacy and other receivables (4,842) (13,196) 4,477
Merchandise inventories (12,397) 10,625 (40,436)
Other current assets 263 602 748
Current liabilities 6,711 31,824 (2,382)
---------- -------- ---------
Net cash provided by operating activities 115,014 135,620 80,579
---------- -------- ---------
Investing activities:
Payments for property additions and store acquisitions (140,734) (78,007) (70,023)
Receipts from property dispositions 7,310 10,500 4,906
---------- -------- ---------
Net cash used in investing activities (133,424) (67,507) (65,117)
---------- -------- ---------
Financing activities:
Proceeds (repayments) on long term borrowings 34 (60)
Proceeds from short-term borrowings 10,000
Sale (repurchase) of common stock to (from) Profit Sharing Plan (3,417) 2,000
Repurchase of common stock (20,527) (21,888)
Dividend payments (21,783) (21,808) (22,054)
---------- -------- ---------
Net cash used in financing activities (15,166) (42,395) (41,942)
---------- -------- ---------
(Decrease) increase in cash and equivalents (33,576) 25,718 (26,480)
Cash and equivalents at beginning of year 48,552 22,834 49,314
---------- -------- ---------
Cash and equivalents at end of year $ 14,976 $ 48,552 $ 22,834
---------- -------- ---------
---------- -------- ---------
Supplemental disclosures of cash flow information:
Interest paid $ 1,787 $ 1,474 $ 839
Income taxes paid 48,648 36,303 46,278
Supplemental schedule of 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 917 1,720
Assumption of liabilities related to Pacific Northwest acquisition 11,161
</TABLE>
See notes to consolidated financial statements
Longs Drug Stores Annual Report 1999 21
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
Profit Guarantee
Sharing of Profit Total
Common Stock Additional Plan Sharing Retained Stockholders'
---------------
(thousands) Shares Amount Capital Contributions Plan Debt Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 ($.56 per share) (21,808) (21,808)
Profit Sharing Plan:
Issuance of stock for FY97
contribution 375 188 9,767 (9,955) 0
Stock portion of FY98 contribution 9,856 9,856
Purchase of stock from plan (368) (184) (9,531) (9,715)
Reduction of plan debt 3,184 3,184
Restricted stock awards, net 88 44 2,021 2,065
Tax benefits related to employee
stock plans 61 61
Repurchase of common stock (434) (217) (1,118) (9,477) (10,812)
------- -------- --------- -------- --------- --------- ---------
Balance at January 29, 1998 38,629 19,315 110,466 9,856 (4,371) 448,877 584,143
------- -------- --------- -------- --------- --------- ---------
Net income 63,358 63,358
Dividends ($.56 per share) (21,783) (21,783)
Profit Sharing Plan:
Issuance of stock for FY98
contribution 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
------- -------- --------- -------- --------- --------- ---------
------- -------- --------- -------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
22 Longs Drug Stores Annual Report 1999
<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 1999, 1998 and 1997 fiscal years refer to
the 52-week periods ended January 28, 1999, January 29, 1998 and the 53-week
period ended January 30, 1997.
Reclassifications have been made to certain fiscal year 1998 and 1997 amounts
to make them comparable to fiscal year 1999.
Nature of Operations -- The Company operates retail drug stores in
California, Hawaii, Colorado, Nevada, Washington and Oregon 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 $146.6 and $139.1
million at the 1999 and 1998 fiscal year ends.
Property is depreciated using the straight-line method with 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.
Goodwill and other 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 twenty-five 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 $24.0,
$21.6, and $22.5 million for fiscal years 1999, 1998, and 1997, respectively.
Income taxes -- The Company accounts for its taxes in accordance with
Statement of Financial Accounting Standards (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'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 -- Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing net
Longs Drug Stores Annual Report 1999 23
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
income by the weighted average number of common shares and dilutive common
equivalent shares (stock awards) outstanding during the period. 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 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks)
Shares Per Share Shares Per Share Shares Per Share
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Net Income
Per Share 38,527 $1.64 38,590 $1.50 38,987 $1.50
------ ----- ------ ----- ------ -----
Effect of Dilutive
Restricted
Stock Awards 190 174 (.01) 154
------ ----- ------ ----- ------ -----
Diluted
Net Income
Per Share 38,717 1.64 38,764 $1.49 39,141 $1.50
- ---------------------------------------------------------------------------------------------------
</TABLE>
Reporting Comprehensive Income -- Effective fiscal year 1999, the Company
adopted the disclosure requirements of SFAS 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. The Company had no items of comprehensive income and comprehensive
income equals net income for all periods presented.
Disclosures about Segments of an Enterprise and Related Information --
Effective fiscal year 1999, the Company adopted the disclosure requirements
of SFAS 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. The Company operates in one
reportable segment: the operation of retail drug stores in 6 states.
New Accounting Pronouncements -- In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
effective in fiscal year 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. The Company believes that SFAS No. 133 will not have a material impact
on its results of operations or financial position.
LEASES AND OTHER OBLIGATIONS
A significant portion of store properties are leased with original terms
ranging from 10 to 25 years and renewal options covering up to twenty
additional years in five-year to ten-year increments. Leases normally provide
for minimum annual rent with provisions for additional rent based on a
percentage of sales. Lease rentals for fiscal years 1999, 1998, and 1997 were
$43.9, $38.6, and $37.3 million, of which $35.2, $30.7, and $29.6 million
represent minimum payments.
Total minimum rental commitments for non-cancelable leases in effect at 1999
year end were $39.1, $38.7, $37.2, $35.4, and $33.2 million for fiscal years
2000 through 2004, respectively and $299.9 million thereafter.
The Company has an unsecured revolving line of credit of $65.0 million at a
LIBOR based rate, which expires on August 31, 2002. There was $55.0 million
available for use and $663,000 restricted for letters of credit at fiscal
year end 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.
LONG TERM DEBT
In October 1997, the Company purchased equipment that was financed by a $1.7
million note maturing on January 2003. This note bears interest at a rate of
5.69%; the first principal payment was made in February 1998.
24 Longs Drug Stores Annual Report 1999
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
In connection with the accounting of an equity investment in RxAmerica (see
RxAmerica footnote) during fiscal 1998, 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 through October 2017.
In December 1998, the Company purchased equipment for newly acquired stores
and financed the transaction through the issuing of separate notes totaling
$775,000 and $142,000. These notes mature in December 2003 and bear interest
rates of 5.75% and 6.50%, respectively.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Fiscal Year (thousands) 1999
- ----------------------------------------------------------------------------
<S> <C>
Notes Payable 15,100
Less current portion 847
-------
Long-term debt $14,253
-------
-------
</TABLE>
At fiscal year-end 1999, future minimum principal payments on long-term debt
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year 2000 $ 847
Fiscal Year 2001 947
Fiscal Year 2002 961
Fiscal Year 2003 1,010
Fiscal Year 2004 668
Thereafter 10,667
-------
Total 15,100
-------
-------
</TABLE>
Subsequent to fiscal 1999, the Company completed a private placement
financing in which $45 million in senior notes were issued. The debt
consisted of $15 million of 5.85% notes due in 2006 and $30 million of 6.19%
notes due in 2014. The pro ceeds from these notes will be used to repay
short-term borrowings and for general corporate purposes. The note agreements
include various financial and non-financial covenants including limitations
on debt level.
EMPLOYEE COMPENSATION AND BENEFITS
The Company has approximately 18,500 full-time and part-time employees as of
January 28, 1999. 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.
Employees who meet the eligibility requirements are entitled to Profit
Sharing Plan benefits that are funded entirely by the Company. Contributions
to the plan for fiscal years 1999, 1998 and 1997 were $11.0 million, $11.2
million and $11.0 million, respectively. 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 dates selected by the
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 $4.6 million and $3.2 million at 1999 and 1998
fiscal year ends.
TAXES ON INCOME
Significant components of the Company's deferred tax assets and liabilities
as of January 28, 1999 and January 29, 1998 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fiscal year (thousands) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve for vacation pay $ 8,847 $ 8,047
Reserve for worker's compensation 10,010 8,542
State income tax 2,554 2,836
Reserve for restricted stock awards 2,312 1,761
Reserve for health benefits 2,111 1,557
Other 14,116 13,085
------- -------
39,950 35,828
------- -------
Deferred Tax Liabilities:
Depreciation 24,638 25,925
Basis of property 3,599 3,626
Inventories 2,852 1,844
Other 7,982 8,128
------- -------
39,071 39,523
------- -------
Net deferred tax (asset) liability $ (879) $ 3,695
------- -------
------- -------
</TABLE>
Longs Drug Stores Annual Report 1999 25
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year (thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $35,760 $38,518 $27,849
State 8,514 9,694 7,938
------- ------- -------
44,274 48,212 35,787
Deferred (4,574) (10,912) 3,113
------- ------- -------
Total $39,700 $37,300 $38,900
------- ------- -------
------- ------- -------
</TABLE>
The reconciliation between the federal statutory tax rate and the Company's
effective tax rates are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at
statutory rate 35.00% 35.00% 35.00%
State income tax net of
federal benefits 5.01% 5.20% 5.47%
Benefits of ESOP dividends (1.29%) (1.37%) (1.32%)
Other (0.20%) 0.42% 0.74%
------ ------ ------
38.52% 39.25% 39.89%
------ ------ ------
------ ------ ------
</TABLE>
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 outstand ing 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 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares 1,294,670 1,171,488
Unallocated shares 99,058 222,240
--------- ---------
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 1999, 1998 and 1997.
CONTINGENT LIABILITIES
On March 10, 1999, a class action lawsuit was filed against Longs on behalf
of certain management-level employees: department managers, senior department
managers, assistant managers, and second assistant managers. The lawsuit was
filed in the United States District Court for the Northern District of
California. In the lawsuit, current and former employees alleged that the
Company inappropriately classified the plaintiffs as exempt, and consequently
failed to pay them overtime premiums that would otherwise have been required.
The suit also alleges certain record keeping violations. 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
this action may have on the Company's financial results.
26 Longs Drug Stores Annual Report 1999
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
A purported class action was filed against Longs on behalf of pharmacist
employees in the United States District Court for the Northern District of
California on February 18, 1998. The lawsuit claimed the Company engaged in
improper pay practices and failed to keep adequate records. Resolution of
this action has been negotiated and is pending court approval. The settlement
of this lawsuit will not have a material impact to 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.
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 this program ($3.9 million) at January 28, 1999
has been netted against Additional Capital. During fiscal years 1999, 1998,
and 1997, the shares awarded under this program were 122,250, 90,140 and
73,600, respectively.
In November 1994, the Board of Directors authorized a plan to repurchase up
to four million shares of the Company's outstanding common stock from the
open market. As of fiscal year 1998, the Company had repurchased 1,739,000
shares at a cost of $32.6 million in conjunction with the repurchase plan.
There were no repurchases of common stock from the open market during fiscal
year 1999.
During fiscal year 1999, the Company repurchased 105,000 common shares from
the Profit Sharing Plan at market values totaling $3.4 million.
RxAMERICA
On November 6, 1997, Longs Drug Stores and American Drug Stores, Inc. merged
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 1999 or 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.
ACQUISITION
During July 1998, the Company completed its acquisition of 18 stores in
Washington and 2 stores in Portland, Oregon from Western Drug Distributors,
Inc., a franchise of Drug Emporium (Pacific Northwest acquisition). This
transaction was accounted for as a purchase and results of operations for the
acquired stores are included with those of the Company since completion of
the acquisition. The goodwill associated with the transaction is being
amortized over twenty-five years using the straight-line method.
Longs Drug Stores Annual Report 1999 27
<PAGE>
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
Longs Drug Stores Corporation:
We have audited the accompanying consolidated balance sheets of Longs Drug
Stores Corporation and its subsidiary (the Company) as of January 28, 1999
and January 29, 1998, 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 28, 1999. 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 condyucted 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 28, 1999
and January 29, 1998, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended January 28, 1999
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 10, 1999
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Earnings Dividends Stock
Thousands except Gross Net Per Per Price
per share data Sales Profit Income Diluted Share Share Range
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter 1 $ 752,799 $201,964 $14,190 .37 .14 $28-34
Quarter 2 786,795 211,106 14,850 .38 .14 27-31
Quarter 3 808,285 213,756 10,984 .28 .14 26-44
Quarter 4 919,025 242,434 23,334 .61 .14 32-41
---------- -------- ------- ----- ---- ------
FYE 1999 $3,266,904 $869,260 $63,358 $1.64 $.56 26-44
---------- -------- ------- ----- ---- ------
---------- -------- ------- ----- ---- ------
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
---------- -------- ------- ----- ---- ------
---------- -------- ------- ----- ---- ------
</TABLE>
28 Longs Drug Stores Annual Report 1999
<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 L. CHENEVICH
Group Executive Vice President
Visa International
WILLIAM G. COMBS
Vice President, Administration (retired)
Edward E. Johnston*
Insurance Consultant
MARY S. METZ, PH.D.*
President
S.H. Cowell Foundation
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
* Member of Audit Committee
** Also an officer of
Longs Drug Stores Corporation
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
CHARLES M. ARMSTRONG
Vice President/District Manager
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
JEFFREY J. MEDER
Vice President, Pacific Northwest
SAL PETRUCELLI
Vice President/District Manager
LARRY P. PRATO
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
GROVER L. WHITE**
Vice President, Controller
and Assistant Secretary
ROBERT W. WILSON
Vice President/District Manager
TRANSFER AGENT & REGISTRAR
Chasemellon Shareholder Services
85 Challenger Road
Ridgefield Park, NJ 07660
1-888-213-0886
www.chasemellon.com
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 18, 1999, 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.
Design: Heiney & Craig, Inc., San Francisco
<PAGE>
[PHOTO]
LONGS DRUGS
141 North Civic Drive
P.O. Box 5222
Walnut Creek
California 94596
(925) 937-1170
www.longs.com
<PAGE>
EXHIBIT 23
[DELOITTE & TOUCHE 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 10, 1999 appearing in and incorporated by reference
in Annual Report on Form 10-K of Longs Drug Stores Corporation for the fiscal
year ended January 28, 1999.
/s/ Deloitte & Touche LLP
April 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-28-1999 JAN-29-1998
<PERIOD-START> JAN-30-1998 JAN-31-1997
<PERIOD-END> JAN-28-1999 JAN-29-1998
<CASH> 14,976 48,552
<SECURITIES> 0 0
<RECEIVABLES> 68,072 63,107
<ALLOWANCES> 0 0
<INVENTORY> 382,248 345,082
<CURRENT-ASSETS> 492,528 481,322
<PP&E> 817,893 747,206
<DEPRECIATION> 345,995 312,112
<TOTAL-ASSETS> 1,025,130 946,289
<CURRENT-LIABILITIES> 338,983 312,769
<BONDS> 0 0
0 0
0 0
<COMMON> 19,473 19,315
<OTHER-SE> 619,366 564,828
<TOTAL-LIABILITY-AND-EQUITY> 1,025,130 946,289
<SALES> 3,266,904 2,952,921
<TOTAL-REVENUES> 0 0
<CGS> 2,397,644 2,166,744
<TOTAL-COSTS> 3,163,846 2,857,895
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 103,058 95,026
<INCOME-TAX> 39,700 37,300
<INCOME-CONTINUING> 63,358 57,726
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 63,358 57,726
<EPS-PRIMARY> 1.64 1.50
<EPS-DILUTED> 1.64 1.49
</TABLE>
