Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number 1-8978

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

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 38,449,733 shares of common stock outstanding as of November 28, 2002.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (unaudited)

See notes to condensed consolidated financial statements.

1

Condensed Consolidated Balance Sheets

See notes to condensed consolidated financial statements.

2

Condensed Consolidated Statements of Cash Flows (unaudited)

See notes to condensed consolidated financial statements.

3

Condensed Consolidated Statements of Stockholders' Equity
For the 53 weeks ended January 31, 2002 and the 39 weeks ended October 31, 2002

See notes to condensed consolidated financial statements.

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

        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 reflect all adjustments that are, in management's opinion, necessary for a fair statement of the results for the periods presented. These financial statements should be read in conjunction with the Annual Report of the Company on Form 10-K for the fiscal year ended January 31, 2002. The condensed consolidated financial statements as of and for the periods ended October 31, 2002 and October 25, 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.    Significant Accounting Policies

        Cash and equivalents include investments with original maturities of three months or less when purchased.

        Pharmacy and other receivables primarily include amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies, governmental agencies and vendors) on the sale of prescription drugs. Receivables are stated net of an allowance for uncollectible accounts.

        Merchandise inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out (LIFO) method. The excess of specific cost over LIFO values was $169.7 million at October 31, 2002, $160.4 million at October 25, 2001 and $165.3 million at January 31, 2002. LIFO costs for interim financial statements are estimated based on projected annual inflation rates. Actual LIFO costs are calculated during the fourth quarter of the fiscal year when final inflation rates and inventory levels are determined.

        Property is depreciated using the straight-line method with estimated useful lives of twenty to thirty-three years for buildings, the shorter of the life of the lease or estimated useful life for leasehold improvements and three to twenty years for equipment and fixtures. The Company capitalizes costs that relate to the application and infrastructure development stage of web site development. Such costs are included in equipment and fixtures and are amortized over seven years.

        Buildings and leasehold improvements include assets under capital leases of $7.6 million at October 31, 2002 and $4.4 million as of January 31, 2002. The corresponding capital lease obligation is included in long-term liabilities. The amount capitalized for assets under capital leases is the present value at the beginning of the lease term of the aggregate future minimum lease payments. The amortization of such assets is included in depreciation expense. Accumulated amortization on assets under capital leases was not significant as of October 31, 2002 or January 31, 2002.

        Repairs and maintenance costs are expensed as incurred. Costs for improvements that enhance the usefulness or extend the useful life of an asset are capitalized and depreciated over the asset's estimated useful life.

        Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired entities. Effective with the first quarter of fiscal 2003, goodwill is not amortized, but is subject to annual impairment testing (see "New Accounting Pronouncements").

5

        Intangible assets consist primarily of purchased pharmacy customer lists, non-compete agreements and beverage licenses. Effective with the first quarter of fiscal 2003, intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment testing (see "New Accounting Pronouncements"). Intangible assets with finite useful lives are amortized using the straight-line method over those useful lives.

        Other assets include joint venture investments accounted for under the equity method.

        Impairment of Long-Lived Assets—The Company reviews long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Using its best estimates based on reasonable and supportable assumptions and projections, the Company records an impairment loss to write the assets down to their fair values if the carrying values of such assets exceed their related expected future cash flows.

        Store Closure Reserves—The Company records the estimated costs associated with closing a store in accordance with Emerging Issues Task Force Issue No. 94-3 ("Issue 94-3"). Issue 94-3 requires that such store closing costs be recorded in the period in which the store is identified and approved by management under a plan of termination, which includes the method of disposition and the expected date of completion. These costs include direct costs to terminate a lease or sub-lease a property, net of expected sublease income, and the difference between the carrying values and estimated recoverable values of long-lived tangible and intangible assets. Severance and other employee-related costs are recorded in the period in which the closure and related severance packages are communicated to the affected employees. Losses on the liquidation of inventories are recorded in cost of merchandise sold when the inventories are sold or otherwise disposed of.

        Beginning January 1, 2003, the Company will recognize the costs associated with closing a store when the liability is incurred, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (see "New Accounting Pronouncements").

        Fair Value of Financial Instruments<