<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 27, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period from . . . . . . . . to . . . . . . . .
Commission file number 1-8978
LONGS DRUG STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 68-0048627
------------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
------------------------------------- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (925) 937-1170
--------------
-------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
There were 37,776,521 shares of common stock outstanding as of May 25, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CONDENSED CONSOLIDATED INCOME (UNAUDITED) For the Quarters Ended
APRIL 27, April 29,
2000 1999
------------ ------------
---(Thousands Except Per Share)--
<S> <C> <C>
SALES $ 955,731 $ 869,430
COSTS AND EXPENSES:
Cost of merchandise sold 709,337 640,915
Operating and administrative 223,055 201,363
Interest expense 3,575 853
Interest income (202) (351)
------------ ------------
INCOME BEFORE TAXES ON INCOME 19,966 26,650
TAXES ON INCOME 8,000 10,300
------------ ------------
NET INCOME $ 11,966 $ 16,350
============ ============
NET INCOME PER COMMON SHARE:
BASIC $ .31 $ .42
DILUTED $ .31 $ .42
DIVIDENDS $ .14 $ .14
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
BASIC 39,123 38,797
DILUTED 39,184 38,926
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-1-
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 27, April 29, January 27,
2000 1999 2000
------------- ------------ -------------
ASSETS -------------(Thousands Except Share Information)------------
---------(Unaudited)---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 40,739 $ 58,127 $ 16,404
Pharmacy and other receivables 88,157 75,901 94,417
Merchandise inventories 429,746 371,298 433,082
Deferred income taxes 26,453 23,167 24,695
Other 8,195 2,134 13,577
---------- ---------- ----------
Total current assets 593,290 530,627 582,175
---------- ---------- ----------
PROPERTY:
Land 105,930 95,893 105,688
Buildings and leasehold improvements 435,174 397,263 428,822
Equipment and fixtures 377,699 328,661 361,313
Beverage licenses 8,010 7,576 7,985
---------- ---------- ----------
Total property at cost 926,813 829,393 903,808
Less accumulated depreciation 384,091 353,077 374,798
---------- ---------- ----------
Property, net 542,722 476,316 529,010
GOODWILL, NET 138,416 39,730 136,665
OTHER ASSETS 21,522 21,155 22,473
---------- ---------- ----------
TOTAL $1,295,950 $1,067,828 $1,270,323
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 225,913 $ 183,384 $ 187,835
Employee compensation and benefits 74,863 71,561 74,648
Taxes payable 44,196 40,607 53,026
Current portion of long-term debt
and guarantee of Profit Sharing
Plan debt 3,058 3,910 3,042
Other 32,890 28,473 33,344
---------- ---------- ----------
Total current liabilities 380,920 327,935 351,895
---------- ---------- ----------
LONG-TERM DEBT 188,793 56,921 181,180
DEFERRED INCOME TAXES AND OTHER
LONG-TERM LIABILITIES 33,542 31,752 34,554
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock (39,226,000, 39,265,000,
and 39,385,000 shares outstanding) 19,613 19,633 19,692
Additional capital 141,675 131,152 135,358
Common stock contribution to Profit
Sharing Plan - - 10,181
Guarantee of Profit Sharing Plan debt - (911) -
Retained earnings 531,407 501,346 537,463
---------- ---------- ----------
Total stockholders' equity 692,695 651,220 702,694
---------- ---------- ----------
TOTAL $1,295,950 $1,067,828 $1,270,323
========== ========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarters Ended
April 27, April 29,
2000 1999
-----------------------------
---------(Thousands)---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,966 $ 16,350
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,435 13,238
Deferred income taxes and other (2,770) 918
Restricted stock awards 783 683
Tax benefits credited to stockholders' equity 61 4
Changes in assets and liabilities:
Pharmacy and other receivables 6,260 (7,829)
Merchandise inventories 4,251 10,950
Other current assets 5,382 (290)
Current liabilities 29,012 (2,367)
--------- ---------
Net cash provided by operating activities $ 71,380 $ 31,657
========= =========
INVESTING ACTIVITIES:
Payments for property additions and other assets (34,320) (20,045)
Receipts from property dispositions 1,251 2,209
--------- ---------
Net cash used in investing activities (33,069) (17,836)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings, net 8,833 34,820
Repurchase of common stock (15,174) -
Sale of stock to Profit Sharing Plan 1,053 -
Repurchase of stock from Profit Sharing Plan (3,120) -
Dividend payments (5,568) (5,490)
--------- ---------
Net cash provided by (used in) financing activities (13,976) 29,330
--------- ---------
INCREASE IN CASH AND EQUIVALENTS 24,335 43,151
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 16,404 14,976
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 40,739 $ 58,127
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 27, 2000 and Quarter Ended April 27, 2000
<TABLE>
<CAPTION>
GUARANTEE
COMMON STOCK PROFIT SHARING OF PROFIT TOTAL
------------------ 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 28, 1999 38,946 $19,473 $119,961 $ 9,834 $(911) $490,482 $638,839
Net income 68,974 68,974
Dividends ($.56 per share) (21,997) (21,997)
Profit Sharing Plan:
Issuance of stock 269 134 9,700 (9,834) 0
for FY99 contribution
Stock portion of 10,181 10,181
FY00 contribution
Sale of stock to plan 70 35 1,981 2,016
Reduction of plan debt 911 911
Restricted stock awards, net 100 50 2,882 2,932
Tax benefits related 834 834
to stock awards
Tax benefits related to
employee stock plans 4 4
BALANCE AT JANUARY 27, 2000 39,385 19,692 135,358 10,181 0 537,463 702,694
UNAUDITED: 11,966 11,966
Net income
Dividends ($.14 per share) (5,568) (5,568)
Profit Sharing Plan:
Issuance of stock
for FY00 contribution 550 275 9,906 (10,181) 0
Sale of stock to plan 46 23 1,030 1,053
Purchase of stock
from plan (165) (82) (3,038) (3,120)
Restricted stock awards, net 166 83 700 783
Tax benefits related
to stock awards 61 61
Repurchase of common stock (756) (378) (2,342) (12,454) (15,174)
BALANCE AT APRIL 27, 2000 39,226 $19,613 $141,675 $ 0 $ 0 $531,407 $692,695
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Condensed Consolidated Financial Statements include Longs Drug
Stores Corporation (Company) and its wholly-owned subsidiary, Longs
Drug Stores California, Inc. All inter-company accounts and
transactions have been eliminated. The statements have been
prepared on a basis consistent with the accounting policies described
in the Annual Report of the Company previously filed with the
Commission on Form 10-K for the year ended January 27, 2000, and
reflect all adjustments and eliminations which are, in management's
opinion, necessary for a fair statement of the results for the
periods. The Condensed Consolidated Financial Statements for the
periods ended April 27, 2000, and April 29, 1999, are unaudited. The
Condensed Consolidated Balance Sheet at January 27, 2000, and
Condensed Consolidated Statement of Stockholders' Equity for the year
then ended, presented herein, have been derived from the audited
consolidated financial statements of the Company included in the
Form 10-K for the year ended January 27, 2000.
2. Certain reclassifications have been made to prior year financial
statements in order to conform to current financial statement
presentation.
3. The financial statements have been prepared using the Last In First Out
(LIFO) method of accounting for inventories. The excess of specific
cost inventory over LIFO valuation was $154.8 million at April 27,
2000, $147.0 million at April 29, 1999, and $151.0 million at
January 27, 2000. A final valuation of inventory under the LIFO method
can be made only after year-end based on ending inventory levels and
inflation rates for the year. Interim LIFO calculations are based on
management's estimates of year-end inventory levels and inflation
rates for the year.
4. The Company has an unsecured revolving line of credit of
$130.0 million which expires on October 14, 2004, and accrues interest
at LIBOR based rates. Borrowings do not require repayment for five
years. As of the end of first quarter fiscal 2000, there was $65.0
million outstanding under the line of credit with a weighted average
interest rate of 6.78%. The amount outstanding has been included in
long-term debt, as the Company does not intend to pay down the line of
credit over the next twelve-month period. The line of credit contains
various financial covenants which require maximum debt to
capitalization and minimum fixed charge coverage ratios. The Company
has complied with restrictions and limitations included in the note
agreement.
5. During the first quarter of fiscal 2001, the Company repurchased
756,000 shares of common stock from the open market at market values
totaling $15.2 million and 165,000 shares of common stock from the
Profit Sharing Plan at market values totaling $3.1 million.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
First quarter fiscal 2001 sales increased 9.9% to $955.7 million compared to
$869.4 million last year. Incremental sales from the 32-store acquisition
(one additional store was acquired during the quarter) contributed 7.0% of
total sales growth. A pharmacy system issue in which cost increases were not
reflected in our sales price impacted sales by $1.6 million. This issue has
been resolved and will not effect future quarters. Total same-store sales
increased 2.5% for the first quarter reflecting the negative impact of the
pharmacy system issue, reduced sales in our Pacific Northwest stores and a
mild flu season.
Pharmacy sales increased 14.9% for the first quarter led by a 9.8% increase
in the average retail price of a prescription and a 4.9% increase in script
volume. Pharmacy sales from the 32-store acquisition represented 6.6% of
total pharmacy sales growth. Pharmacy same-store sales growth of 8.7%
increased compared to double-digit growth experienced in prior quarters due
to the system issue and milder flu season mentioned previously. Pharmacy
represented 41.8% of total sales in first quarter, up from 40.0% in the prior
year. The percentage of pharmacy sales sold through third party plans
increased to 87.8% compared to 83.2% in the prior year.
Front-end sales increased 6.6% for the first quarter and same-store front-end
sales decreased 1.6% compared to prior year. Front-end sales from the
32-store acquisition represented 7.3% of total front-end sales growth.
Same-store sales growth in the core categories of cosmetics and photo
processing outperformed the total front-end same-store sales growth. The
Company installed 18 mailing centers and 22 in-store photo labs in the first
quarter, bringing project totals to 102 mailing centers and 262 in-store
photo labs helping to fuel front-end sales.
GROSS MARGINS
Gross profit dollars for the first quarter increased 7.8% to $246.4 million,
however, gross margin as a percent of sales (including LIFO) decreased to
25.78% from 26.28% in the prior year. The increase in gross margin dollars
was primarily driven by new stores and stores acquired last year, as well as
a small contribution from the stores open for at least a full year. Gross
margin percent was reduced by $1.6 million due to the Pharmacy system issue
mentioned above and by the write off of $1.6 million in aged vendor
allowances that it had determined to be uncollectible. In addition, the
growth of lower margin pharmacy sales to 41.8% of total sales negatively
impacted total gross margin as a percent of sales.
The Company uses the Last-In First-Out (LIFO) method of inventory valuation.
The LIFO provision was $3.8 million for the first quarter compared to $0.4
million in the prior year. The LIFO increase was primarily driven by cost
increases in pharmacy, cosmetics and toiletries.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percent of sales increased
from 23.16% to 23.34% for the first quarter. New stores and stores
acquired during the past year primarily accounted for the increase in
operating expenses, which was partially offset by positive variances in
advertising and year 2000 expenses.
-6-
<PAGE>
INCOME BEFORE TAXES/NET INCOME
Income before taxes decreased from $26.7 million to $20.0 million for the
first quarter. Net interest expense for first quarter was $3.4 million
compared to $0.5 million in the prior year due to increased borrowings for
acquired stores, new stores opened last year and stock repurchases.
The Company's effective tax rate for the first quarter was 40.1%, up from
38.6% in the prior year. The increase in the effective tax rate reflected
loss of the tax deduction for dividends used by the Employee Stock Ownership
Plan (ESOP) to pay down ESOP debt.
Net income decreased from $16.4 million to $12.0 million in the first
quarter. Diluted earnings per share decreased to $0.31 per share compared to
$0.42 per share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash provided by operating activities increased by $39.7 million compared to
prior year primarily due to a decrease in warehouse inventories and an
increase in current liabilities.
Cash used in investing activities for the first quarter increased $15.2
million compared to prior year due to additional payments for property
additions.
The Company opened two new stores, including one acquired store, and closed
one store during the first quarter and expects to open up to 22 additional
new stores during the year.
Net capital expenditures for the quarter were $33.1 million. The Company
estimates its capital expenditures for the fiscal year to be approximately
$150 million, supporting the increase in new stores and continued investment
in technology.
Expenditures for capital projects, dividends and stock repurchases are
expected to be funded from operations, cash reserves and borrowings as deemed
necessary.
Financing activities in first quarter included 756,000 shares of common stock
purchased from the open market at market values totaling $15.2 million and
165,000 shares of common stock purchased from the Profit Sharing Plan at
market values totaling $3.1 million. Stock repurchases are made at the
discretion of the Board of Directors and are dependent upon market stock
price and available cash flow.
Subsequent to the end of the first quarter, on May 25, 2000, the Company
purchased 1,315,790 shares of common stock from the estate of Vera M. Long.
The total purchase was $25 million or $19 per share. The per share price for
the transaction was supported by Merrill Lynch & Co., Inc. and was approved
by the Board of Directors. This purchase was not part of the 2,000,000 share
repurchase program approved by the Board of Directors in the fourth quarter
of last year. The Company has 1,243,800 shares still available for repurchase
under that authorization.
During the first quarter fiscal 2000, bank borrowings of $65.0 million were
outstanding on the Company's $130 million line of credit with a weighted
average interest rate of 6.78%. The line of credit expires on October 14,
2004, and accrues interest at LIBOR-based rates. Borrowings do not require
repayment for five years. The $65.0 million outstanding has been included in
long-term debt, as the Company does not intend to pay down the line of credit
over the next twelve-month period.
-7-
<PAGE>
FORWARD LOOKING INFORMATION
Certain information in this form 10-Q, as well as in other public filings,
press releases and oral statements made by our representatives, is
forward-looking information based on current expectations and plans that
involve risks and uncertainties. Forward-looking information includes
statements concerning pharmacy sales trends, prescriptions margins, number of
store openings and the level of capital expenditures; as well as those that
include or are preceded by the words "expects, " "estimates," "believes" or
similar language. For such statements, we claim the protection of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
The following factors, in addition to those discussed elsewhere in this Form
10-Q and in our Annual Reports, could cause results to differ materially from
management expectations as projected in such forward-looking statements:
changes in economic conditions generally or in the markets served by the
company; consumer preferences and spending patterns; competition from other
drugstore chains, supermarkets, other retailers and mail order companies;
changes in state or federal legislation or regulations; the efforts of third
party payors to reduce prescription drug costs; the availability and cost of
real estate and construction; accounting policies and practices; the
company's ability to hire and retain pharmacists and other store and
management personnel; the company's relationships with its suppliers; the
company's ability to successfully implement new computer systems and
technology; and adverse determinations with respect to litigation or other
claims. The company assumes no obligation to update its forward-looking
statements to reflect subsequent events or circumstances.
-8-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports On Form 8-K
There have been no reports on Form 8-K filed during the quarter
ended April 27, 2000.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LONGS DRUG STORES CORPORATION
-----------------------------
(REGISTRANT)
Date June 9, 2000 /s/ Grover L. White
-------------------- -----------------------------
Grover L. White
Vice President, Controller
(PRINCIPAL ACCOUNTING OFFICER)
/s/ Steven F. McCann
-----------------------------
Steven F. McCann
Senior Vice President
- Chief Financial Officer and
Treasurer
(CHIEF FINANCIAL OFFICER)
