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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 1, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-8978

LONGS DRUG STORES CORPORATION
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)		   68-0048627
(I.R.S. Employer
Identification No.)

141 North Civic Drive
Walnut Creek, California
(Address of principal executive offices)
 
94596
(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 ý    No o

        There were 38,350,257 shares of common stock outstanding as of August 29, 2002.


Table of Contents

PART I—FINANCIAL INFORMATION    
 
Item 1
 
Condensed Consolidated Financial Statements
 
1
 
Item 2
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
10
 
Item 3
 
Quantitative and Qualitative Disclosures of Market Risk
 
17

PART II—OTHER INFORMATION
 
 
 
Item 4
 
Submission of Matters to a Vote of Security Holders
 
18
 
Item 6
 
Exhibits and Reports on Form 8-K
 
18
 
Signature Page
 
19
 
Certifications of Chief Executive Officer and Chief Financial Officer
 
20

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (unaudited)

 
   For the 13 weeks ended
   For the 26 weeks ended
  
 
   August 1,
2002
   July 26,
2001
   August 1,
2002
   July 26,
2001
  
 
   (Thousands Except Per Share Amounts)

  
Sales   $ 1,101,630   $ 1,041,926   $ 2,191,459   $ 2,073,989  

Cost of merchandise sold
 
 
811,921
 
 
771,862
 
 
1,619,985
 
 
1,541,247
 
   
 
 
 
 
 
Gross profit
 
 
289,709
 
 
270,064
 
 
571,474
 
 
532,742
 

Operating and administrative expenses
 
 
249,255
 
 
228,981
 
 
491,604
 
 
451,014
 
Depreciation and amortization     19,216     18,856     38,082     37,457  
Provision (benefit) for store closures and asset impairment, net     —     —     —     (982 )
Legal settlements and other disputes     469     —     469     —  
   
 
 
 
 
 
Operating income
 
 
20,769
 
 
22,227
 
 
41,319
 
 
45,253
 

Interest expense
 
 
3,397
 
 
3,801
 
 
6,728
 
 
7,860
 
Interest income     (276 )   (220 )   (646 )   (553 )
   
 
 
 
 
 
Income before income taxes and cumulative effect of accounting change
 
 
17,648
 
 
18,646
 
 
35,237
 
 
37,946
 

Income taxes
 
 
6,707
 
 
7,400
 
 
13,326
 
 
15,100
 
   
 
 
 
 

Income before cumulative effect of accounting change
 
 
10,941
 
 
11,246
 
 
21,911
 
 
22,846
 

Cumulative effect of accounting change (net of tax benefit of $16,410)
 
 
—
 
 
—
 
 
(24,625
)
 
—
 
   
 
 
 
 

Net income (loss)
 
$
10,941
 
$
11,246
 
$
(2,714
)
$
22,846
 
   
 
 
 
 

Basic earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Income before cumulative effect of accounting change   $ 0.29   $ 0.30   $ 0.58   $ 0.61  
  Cumulative effect of accounting change (net of tax benefit of $0.43)     —     —     (0.65 )   —  
   
 
 
 
 
  Net income (loss)   $ 0.29   $ 0.30   $ (0.07 ) $ 0.61  
   
 
 
 
 
Diluted earnings (loss) per common share:                          
  Income before cumulative effect of accounting change   $ 0.29   $ 0.30   $ 0.57   $ 0.61  
  Cumulative effect of accounting change (net of tax benefit of $0.43)     —     —     (0.64 )   —  
   
 
 
 
 
  Net income (loss)   $ 0.29   $ 0.30   $ (0.07 ) $ 0.61  
   
 
 
 
 

Dividends per common share
 
$
0.14
 
$
0.14
 
$
0.28
 
$
0.28
 

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic     37,907     37,432     37,839     37,340  
  Diluted     38,234     37,703     38,159     37,640  

See notes to condensed consolidated financial statements.

1

Condensed Consolidated Balance Sheets

 
   August 1,
2002
   July 26,
2001
   January 31,
2002
  
 
   (Thousands Except Share Information)

  
ASSETS                    
Current Assets:     -------(Unaudited)-------        
Cash and equivalents   $ 47,099   $ 61,521   $ 123,187  
Pharmacy and other receivables, net     122,670     101,475     122,494  
Merchandise inventories     423,047     397,504     406,383  
Deferred income taxes     23,758     27,911     27,297  
Other     8,113     5,107     5,053  
   
 
 
 
  Total current assets     624,687     593,518     684,414  
   
 
 
 
Property:                    
Land     109,486     108,948     104,928  
Buildings and leasehold improvements     505,200     478,832     488,492  
Equipment and fixtures     491,524     440,525     475,048  
   
 
 
 
  Total property at cost     1,106,210     1,028,305     1,068,468  
Less accumulated depreciation     507,804     439,478     476,185  
   
 
 
 
    Property, net     598,406     588,827     592,283  
   
 
 
 
Goodwill     82,231     125,881     123,306  
Intangible assets, net     5,580     5,773     5,574  
Other assets     6,085     24,879     6,014  
   
 
 
 
    Total   $ 1,316,989   $ 1,338,878   $ 1,411,591  
   
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY                    
Current Liabilities:                    
Accounts payable   $ 235,508   $ 246,441   $ 270,473  
Short-term borrowings     —     10,000     —  
Employee compensation and benefits     83,023     79,961     83,089  
Taxes payable     33,536     45,172     61,394  
Current portion of long-term debt     2,442     3,156     2,629  
Other     34,011     30,147     30,169  
   
 
 
 
  Total current liabilities     388,520     414,877     447,754  
   
 
 
 
Long-term debt     184,533     195,368     198,774  
Deferred income taxes and other long-term liabilities     30,252     28,263     43,490  
Commitments and Contingencies                    
Stockholders' Equity:                    
Common stock (38,351,000, 37,830,000 and 37,977,000 shares outstanding)     19,176     18,915     18,988  
Additional capital     166,543     153,633     156,977  
Common stock contribution to Profit Sharing Plan     —     —     2,939  
Unearned compensation     (5,300 )   (5,142 )   (4,007 )
Retained earnings     533,265     532,964     546,676  
   
 
 
 
  Total stockholders' equity     713,684     700,370     721,573  
   
 
 
 
      Total   $ 1,316,989   $ 1,338,878   $ 1,411,591  
   
 
 
 

See notes to condensed consolidated financial statements.

2

Condensed Consolidated Statements of Cash Flows (unaudited)

 
   For the 26 weeks ended
  
 
   August 1,
2002
   July 26,
2001
  
 
   (Thousands)

  
Operating Activities:              
  Net income (loss)   $ (2,714 ) $ 22,846  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
      Cumulative effect of accounting change     24,625     —  
      Depreciation and amortization     38,082     37,457  
      Deferred income taxes and other     8,231     4,125  
      Stock awards, net     969     1,017  
      Common stock contribution to benefit plans     4,485     3,136  
      Tax benefits related to stock awards     68     141  
      Changes in assets and liabilities:              
        Pharmacy and other receivables     309     2,831  
        Merchandise inventories     (16,664 )   26,835  
        Other assets     (3,708 )   2,806  
        Current liabilities     (59,047 )   (12,800 )
   
 
 
      Net cash provided by (used in) operating activities     (5,364 )   88,394  
   
 
 

Investing Activities:
 
 
 
 
 
 
 
  Payments for property additions, store acquisitions and other assets     (47,603 )   (52,076 )
  Receipts from property dispositions and sale-leasebacks     2,004     3,713  
   
 
 
      Net cash used in investing activities     (45,599 )   (48,363 )
   
 
 

Financing Activities:
 
 
 
 
 
 
 
  Repayments of long-term borrowings     (14,428 )   (2,637 )
  Repayments of short-term borrowings     —     (10,000 )
  Dividend payments     (10,697 )   (10,565 )
   
 
 
      Net cash used in financing activities     (25,125 )   (23,202 )
   
 
 

Increase (decrease) in cash and equivalents
 
 
(76,088
)
 
16,829
 
Cash and equivalents at beginning of period     123,187     44,692  
   
 
 

Cash and equivalents at end of period
 
$
47,099
 
$
61,521
 
   
 
 

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
  Cash paid for interest     6,436     7,322  
  Cash paid for income taxes     17,110     15,494  

See notes to condensed consolidated financial statements.

3

Condensed Consolidated Statements of Stockholders' Equity
For the 53 weeks ended January 31, 2002 and the 26 weeks ended August 1, 2002

 
    
    
    
   Common
Stock
Contributions
to Profit
Sharing Plan
    
    
    
  
 
   Common Stock
    
    
    
    
  
 
   Additional
Capital
   Unearned
Compensation
   Retained
Earnings
   Total
Stockholders'
Equity
  
 
   Shares
   Amount
  
 
   (Thousands)

  
Balance at January 25, 2001   37,367   $ 18,683   $ 141,200   $ 7,695   $ (4,466 ) $ 520,683   $ 683,795  
Net income                                 47,168     47,168  
Dividends ($.56 per share)                                 (21,175 )   (21,175 )
Employee Savings and Profit Sharing Plan:                                          
  Issuance of stock for FY01 profit sharing contribution   287     144     7,551     (7,695 )               —  
  Stock portion of FY02 profit sharing contribution                     2,939                 2,939  
  Issuance of stock for 401(k) matching contributions   285     143     6,776                       6,919  
Stock awards, net of forfeitures   38     18     1,309           (1,426 )         (99 )
Amortization of restricted stock awards                           1,885           1,885  
Tax benefits related to stock awards               141                       141  
   
 
 
 
 
 
 
 
Balance at January 31, 2002   37,977     18,988     156,977     2,939     (4,007 )   546,676     721,573  
   
 
 
 
 
 
 
 

Unaudited:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss                                 (2,714 )   (2,714 )
Dividends ($.28 per share)                                 (10,697 )   (10,697 )
Employee Savings and Profit Sharing Plan:                                          
  Issuance of stock for FY02 profit sharing contribution   120     60     2,879     (2,939 )               —  
  Issuance of stock for 401(k) matching contributions   167     84     4,401                       4,485  
Stock awards, net of forfeitures   87     44     2,218           (2,358 )         (96 )
Amortization of restricted stock awards                           1,065           1,065  
Tax benefits related to stock awards               68                       68  
   
 
 
 
 
 
 
 
Balance at August 1, 2002   38,351   $ 19,176   $ 166,543   $ —   $ (5,300 ) $ 533,265   $ 713,684  
   
 
 
 
 
 
 
 

See notes to condensed consolidated financial statements.

4


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
The accompanying condensed consolidated financial statements include Longs Drug Stores Corporation ("Longs" or the "Company") and its wholly owned subsidiaries. All significant inter- company accounts and transactions have been eliminated. The condensed consolidated financial statements have been prepared on a basis consistent with the accounting policies described in the Annual Report of the Company on Form 10-K for the fiscal year ended January 31, 2002, and reflect all adjustments which are, in management's opinion, necessary for a fair statement of the results for the periods presented. The condensed consolidated financial statements as of and for the periods ended August 1, 2002 and July 26, 2001 are unaudited. The condensed consolidated balance sheet as of January 31, 2002, 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 fiscal year ended January 31, 2002. Certain reclassifications have been made to prior year financial statements to conform to the current presentation.

2.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will no longer be amortized, but must be tested for impairment annually, or more frequently if events and circumstances indicate there may be an impairment. The Company adopted SFAS No. 141 and SFAS No. 142 in the first quarter of fiscal 2003. The adoption of SFAS No. 141 did not have a material impact on the Company's financial position or results of operations. Upon adoption of SFAS No. 142, the Company discontinued the amortization of goodwill with a carrying value of $123.3 million as of January 31, 2002, and of certain other intangible assets with indefinite lives. Following is a reconciliation of reported earnings and earnings per share to the amounts adjusted for the exclusion of amortization of goodwill and other intangible assets with indefinite lives, net of the related income tax effects:

 
   13 weeks ended
   26 weeks ended
 
   August 1,
2002
   July 26, 2001
   August 1,
2002
   July 26, 2001
 
   Thousands Except Per Share Amounts
Reported income before cumulative effect of accounting change   $ 10,941   $ 11,246   $ 21,911   $ 22,846
Amortization of goodwill, net of tax     —     918     —     1,881
Amortization of other intangibles with indefinite lives, net of tax     —     66     —     132
   
 
 
 
Adjusted income before cumulative effect of accounting change   $ 10,941   $ 12,230   $ 21,911   $