**UNITED STATESSECURITIES 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 July  31, 2003** |
|                                                   |   |   |
| **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**                                                     |   | **68-0048627**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **141  North Civic Drive  Walnut Creek, California**             |   | **94596**                             |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |

 

Registrant’stelephone number, including area code: ** (925) 937-1170**

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

| Yes  ý |   | No  o |
|-----------------------|--------|-----------------|

 

Indicate by check mark whether the registrant is an accelerated filer(defined in Rule 12b-2 of the Exchange Act).

 

| Yes  ý |   | No  o |
|-----------------------|--------|-----------------|

 

There were 37,457,625 shares of common stock outstanding as of August28, 2003.

 

 

----

 

**Table ofContents**

 
| **PART I – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
| Item 1                                  |   | Condensed  Consolidated Financial Statements |
| Item 2                                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3                                  |   | Quantitative  and Qualitative Disclosures of Market Risk |
| Item 4                                  |   | Controls  and Procedures |
|                                    |   |   |
| **PART II – OTHER INFORMATION**    |
|                                    |   |   |
| Item 4                                  |   | Submission of Matters to a Vote of Security  Holders |
| Item 6                                  |   | Exhibits  and Reports on Form 8-K |
| Signature Page                          |

 

----

 

**PART I****–FINANCIAL INFORMATION**

 

**Item1****.****                       CondensedConsolidated Financial Statements**

 

**CondensedConsolidated Statements of Income (unaudited)**

 
|                                                                    |   | **For the 13  weeks ended**              |      | **For the 26  weeks ended** |   |
|-------------------------------------------------------------------------|--------|------------------------------------------|-----------|-----------------------------|--------|
|                                                                    |   | **July 31,  2003**                       |      | **August 1,  2002**         |   | **July 31,  2003** |   | **August 1,  2002** |   |
|                                                                    |   | **(Thousands Except Per Share Amounts)** |      |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |
| Sales                                                                   |   | $                                        | 1,109,463 |                        | $      | 1,101,630 |   | $ | 2,212,593 |   | $ | 2,191,459 |   |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                           |   | 821,424                                  |      | 817,368                     |   | 1,639,447 |   | 1,631,170 |   |
| Gross profit                                                            |   | 288,039                                  |      | 284,262                     |   | 573,146 |   | 560,289 |   |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |
| Operating and  administrative expenses                                  |   | 251,602                                  |      | 243,808                     |   | 502,122 |   | 480,419 |   |
| Depreciation and  amortization                                          |   | 21,891                                   |      | 19,216                      |   | 43,687 |   | 38,082 |   |
| Provision for store  closures and asset impairment                      |   | 2,543                                    |      | —                      |   | 2,543 |   | — |   |
| Legal settlements and other  disputes                                   |   | —                                   |      | 469                         |   | — |   | 469 |   |
| Operating income                                                        |   | 12,003                                   |      | 20,769                      |   | 24,794 |   | 41,319 |   |
| Interest expense                                                        |   | 3,697                                    |      | 3,397                       |   | 7,256 |   | 6,728 |   |
| Interest income                                                         |   | (124                                     | )         | (276                        | )      | (239 | ) | (646 | ) |
| Income before income taxes  and cumulative effect of accounting change  |   | 8,430                                    |      | 17,648                      |   | 17,777 |   | 35,237 |   |
| Income taxes                                                            |   | 3,170                                    |      | 6,707                       |   | 6,684 |   | 13,326 |   |
| Income before cumulative  effect of accounting change                   |   | 5,260                                    |      | 10,941                      |   | 11,093 |   | 21,911 |   |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |
| Cumulative effect of  accounting change (net of tax benefit of $16,410) |   | —                                   |      | —                      |   | — |   | (24,625 | ) |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |
| Net income (loss)                                                       |   | $                                        | 5,260     |                        | $      | 10,941 |   | $ | 11,093 |   | $ | (2,714 | ) |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per  common share:                                |   |                                     |      |                        |   |   |   |   |   |
| Income before cumulative  effect of accounting change                   |   | $                                        | 0.14      |                        | $      | 0.29 |   | $ | 0.30 |   | $ | 0.58 |   |
| Cumulative effect of  accounting change (net of tax benefit of $0.43)   |   | —                                   |      | —                      |   | — |   | (0.65 | ) |
| Net income (loss)                                                       |   | $                                        | 0.14      |                        | $      | 0.29 |   | $ | 0.30 |   | $ | (0.07 | ) |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per  common share:                              |   |                                     |      |                        |   |   |   |   |   |
| Income before cumulative  effect of accounting change                   |   | $                                        | 0.14      |                        | $      | 0.29 |   | $ | 0.30 |   | $ | 0.57 |   |
| Cumulative effect of  accounting change (net of tax benefit of $0.43)   |   | —                                   |      | —                      |   | — |   | (0.64 | ) |
| Net income (loss)                                                       |   | $                                        | 0.14      |                        | $      | 0.29 |   | $ | 0.30 |   | $ | (0.07 | ) |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |   |   |   |   |
| Dividends per common share                                              |   | $                                        | 0.14      |                        | $      | 0.14 |   | $ | 0.28 |   | $ | 0.28 |   |
|                                                                    |   |                                     |      |                        |   |   |   |   |   |   |   |   |   |
| Weighted average number of  shares outstanding:                         |   |                                     |      |                        |   |   |   |   |   |
| Basic                                                                   |   | 37,038                                   |      | 37,907                      |   | 37,243 |   | 37,839 |   |
| Diluted                                                                 |   | 37,219                                   |      | 38,234                      |   | 37,410 |   | 38,159 |   |

 

*See notes to condensed consolidated financialstatements.*

 

1

----

 

**Condensed Consolidated Balance Sheets**

 
|                                                                     |   | **July 31,  2003**                       |      | **August 1,  2002** |   | **January  30,  2003** |   |
|--------------------------------------------------------------------------|--------|------------------------------------------|-----------|---------------------|--------|------------------------|--------|
|                                                                     |   | **(Thousands Except Share Information)** |      |
|                                                                     |   | **(Unaudited)**                          |      |                |   |
| **ASSETS**                                                               |   |                                     |      |                |   |                   |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Current Assets:                                                          |   |                                     |      |                |   |                   |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Cash and cash equivalents                                                |   | $                                        | 65,519    |                | $      | 47,099                 |   | $ | 40,195 |   |
| Pharmacy and other receivables, net                                      |   | 134,815                                  |      | 122,670             |   | 135,610                |   |
| Merchandise inventories, net                                             |   | 409,058                                  |      | 423,047             |   | 443,435                |   |
| Deferred income taxes                                                    |   | 32,283                                   |      | 23,758              |   | 32,131                 |   |
| Other                                                                    |   | 9,484                                    |      | 8,113               |   | 11,290                 |   |
| Total current assets                                                     |   | 651,159                                  |      | 624,687             |   | 662,661                |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Property:                                                                |   |                                     |      |                |   |                   |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Land                                                                     |   | 104,761                                  |      | 109,486             |   | 107,175                |   |
| Buildings and leasehold improvements                                     |   | 536,510                                  |      | 505,200             |   | 524,768                |   |
| Equipment and fixtures                                                   |   | 512,223                                  |      | 491,524             |   | 487,888                |   |
| Total property at cost                                                   |   | 1,153,494                                |      | 1,106,210           |   | 1,119,831              |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Less accumulated depreciation                                            |   | 552,218                                  |      | 507,804             |   | 523,813                |   |
| Property, net                                                            |   | 601,276                                  |      | 598,406             |   | 596,018                |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Goodwill                                                                 |   | 82,085                                   |      | 82,231              |   | 82,085                 |   |
| Intangible assets, net                                                   |   | 6,602                                    |      | 5,580               |   | 5,430                  |   |
| Other assets                                                             |   | 5,762                                    |      | 6,085               |   | 5,877                  |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Total                                                                    |   | $                                        | 1,346,884 |                | $      | 1,316,989              |   | $ | 1,352,071 |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                           |   |                                     |      |                |   |                   |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Current Liabilities:                                                     |   |                                     |      |                |   |                   |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Accounts payable and accrued expenses                                    |   | $                                        | 289,116   |                | $      | 265,688                |   | $ | 270,986 |   |
| Employee compensation and benefits                                       |   | 93,779                                   |      | 83,023              |   | 92,185                 |   |
| Taxes payable                                                            |   | 35,547                                   |      | 33,536              |   | 54,579                 |   |
| Current portion of long-term debt                                        |   | 4,974                                    |      | 2,442               |   | 2,348                  |   |
| Total current liabilities                                                |   | 423,416                                  |      | 384,689             |   | 420,098                |   |
| Long-term debt                                                           |   | 186,558                                  |      | 184,533             |   | 181,429                |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Deferred income taxes and other long-term  liabilities                   |   | 35,096                                   |      | 34,083              |   | 34,074                 |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Commitments and Contingencies                                            |   |                                     |      |                |   |                   |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Stockholders’ Equity:                                               |   |                                     |      |                |   |                   |   |
| Common stock (37,418,000, 38,351,000 and 38,501,000  shares outstanding) |   | 18,709                                   |      | 19,176              |   | 19,250                 |   |
| Additional capital                                                       |   | 167,696                                  |      | 166,543             |   | 169,853                |   |
| Unearned compensation                                                    |   | (3,762                                   | )         | (5,300              | )      | (4,562                 | )      |
| Retained earnings                                                        |   | 519,171                                  |      | 533,265             |   | 531,929                |   |
| Total stockholders’ equity                                          |   | 701,814                                  |      | 713,684             |   | 716,470                |   |
|                                                                     |   |                                     |      |                |   |                   |   |
| Total                                                                    |   | $                                        | 1,346,884 |                | $      | 1,316,989              |   | $ | 1,352,071 |   |

* *

*Seenotes to condensed consolidated financial statements.*

 

2

----

 

**CondensedConsolidated Statements of Cash Flows (unaudited)**

 
|                                                                                                |   | **For the 26  weeks ended** |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                |   | **July 31,  2003**          |   | **August 1,  2002** |   |
|                                                                                                |   | **(Thousands)**             |   |
|                                                                                                |   |                        |   |   |   |
| Operating Activities:                                                                               |   |                        |   |   |   |
| Net income (loss)                                                                                   |   | $                           | 11,093 |   | $ | (2,714 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |   |                        |   |   |   |
| Cumulative effect of accounting change                                                              |   | —                      |   | 24,625 |   |
| Depreciation and amortization                                                                       |   | 43,687                      |   | 38,082 |   |
| Provision for store closures and asset impairment                                                   |   | 2,543                       |   | — |   |
| Deferred income taxes and other                                                                     |   | (753                        | )      | 8,231 |   |
| Stock awards, net                                                                                   |   | 511                         |   | 1,037 |   |
| Common stock contribution to benefit plan                                                           |   | 4,281                       |   | 4,485 |   |
| Changes in assets and liabilities:                                                                  |   |                        |   |   |   |
| Pharmacy and other receivables                                                                      |   | 795                         |   | 309 |   |
| Merchandise inventories                                                                             |   | 34,377                      |   | (16,664 | ) |
| Other assets                                                                                        |   | 1,921                       |   | (3,708 | ) |
| Current liabilities and other                                                                       |   | (308                        | )      | (59,047 | ) |
| Net cash provided by (used in) operating activities                                                 |   | 98,147                      |   | (5,364 | ) |
|                                                                                                |   |                        |   |   |   |
| Investing Activities:                                                                               |   |                        |   |   |   |
| Capital expenditures and acquisitions                                                               |   | (58,787                     | )      | (47,603 | ) |
| Proceeds from property dispositions                                                                 |   | 8,750                       |   | 2,004 |   |
| Net cash used in investing activities                                                               |   | (50,037                     | )      | (45,599 | ) |
|                                                                                                |   |                        |   |   |   |
| Financing Activities:                                                                               |   |                        |   |   |   |
| Proceeds from long-term borrowings                                                                  |   | 10,000                      |   | — |   |
| Repayments of long-term borrowings                                                                  |   | (2,245                      | )      | (14,428 | ) |
| Repurchase of common stock                                                                          |   | (20,023                     | )      | — |   |
| Dividend payments                                                                                   |   | (10,518                     | )      | (10,697 | ) |
| Net cash used in financing activities                                                               |   | (22,786                     | )      | (25,125 | ) |
|                                                                                                |   |                        |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                    |   | 25,324                      |   | (76,088 | ) |
| Cash and cash equivalents at beginning of period                                                    |   | 40,195                      |   | 123,187 |   |
|                                                                                                |   |                        |   |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                           | 65,519 |   | $ | 47,099 |   |
|                                                                                                |   |                        |   |   |   |
| Supplemental disclosure of cash flow information:                                                   |   |                        |   |   |   |
| Cash paid for interest                                                                              |   | 6,571                       |   | 6,436 |   |
| Cash paid for income taxes                                                                          |   | 15,820                      |   | 17,110 |   |

 

*Seenotes to condensed consolidated financial statements.*

 

3

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**CondensedConsolidated Statements of Stockholders’ Equity**

 

For the 52 weeks ended January 30, 2003 andthe 26 weeks ended July 31, 2003

 
|                                                    |   | **Common Stock** |       | **Additional  Capital** |       | **Common  Stock  Contributions  to Profit  Sharing Plan** |       | **Unearned  Compensation** |       | **Retained  Earnings** |       | **Total  Stockholders’  Equity** |       |
|---------------------------------------------------------|--------|------------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|---------------------------------------|------------|
|                                                    |   | **Shares**       |       | **Amount**              |       |
|                                                    |   | **(Thousands)**  |       |
| **Balance at  January 31, 2002**                        |   | **37,977**       | ** ** | **$**                   | **18,988** | ** **                                                | **$**      | **156,977**                | ** ** | **$**                  | **2,939**  | ** **                            | **$**      | **(4,007** | **)** | **$** | **546,676** | ** ** | **$** | **721,573** | ** ** |
|                                                    |   |             |       |                    |       |                                                      |       |                       |       |                   |       |                                  |       |   |   |
| Net income                                              |   |             |       |                    |       |                                                      |       |                       |       |                   |       | 6,702                                 |       | 6,702 |   |
| Dividends ($.56 per share)                              |   |             |       |                    |       |                                                      |       |                       |       |                   |       | (21,449                               | )          | (21,449 | ) |
| 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    |   | 303              |       | 151                     |       | 7,410                                                     |       |                       |       |                   |       |                                  |       | 7,561 |   |
| Stock awards, net of  forfeitures                       |   | 101              |       | 51                      |       | 2,519                                                     |       |                       |       | (2,729                 | )          |                                  |       | (159 | ) |
| Amortization of restricted  stock awards                |   |             |       |                    |       |                                                      |       |                       |       | 2,174                  |       |                                  |       | 2,174 |   |
| Tax benefits related to  stock awards                   |   |             |       |                    |       | 68                                                        |       |                       |       |                   |       |                                  |       | 68 |   |
|                                                    |   |             |       |                    |       |                                                      |       |                       |       |                   |       |                                  |       |   |   |
| **Balance at  January 30, 2003**                        |   | **38,501**       | ** ** | **19,250**              | ** ** | **169,853**                                               | ** ** | **—**                 | ** ** | **(4,562**             | **)**      | **531,929**                           | ** ** | **716,470** | ** ** |
|                                                    |   |             |       |                    |       |                                                      |       |                       |       |                   |       |                                  |       |   |   |
| **Unaudited:**                                          |   |             |       |                    |       |                                                      |       |                       |       |                   |       |                                  |       |   |   |
| Net income                                              |   |             |       |                    |       |                                                      |       |                       |       |                   |       | 11,093                                |       | 11,093 |   |
| Dividends ($.28 per share)                              |   |             |       |                    |       |                                                      |       |                       |       |                   |       | (10,518                               | )          | (10,518 | ) |
| Employee Savings and Profit  Sharing Plan:              |   |             |       |                    |       |                                                      |       |                       |       |                   |       |                                  |       |   |   |
| Issuance of stock for  401(k) matching contributions    |   | 265              |       | 133                     |       | 4,148                                                     |       |                       |       |                   |       |                                  |       | 4,281 |   |
| Stock awards, net of  forfeitures                       |   | 14               |       | 7                       |       | 130                                                       |       |                       |       | (92                    | )          |                                  |       | 45 |   |
| Amortization of restricted  stock awards                |   |             |       |                    |       |                                                      |       |                       |       | 892                    |       |                                  |       | 892 |   |
| Tax expense related to  stock awards                    |   |             |       |                    |       | (426                                                      | )          |                       |       |                   |       |                                  |       | (426 | ) |
| Repurchase of common stock                              |   | (1,362           | )          | (681                    | )          | (6,009                                                    | )          |                       |       |                   |       | (13,333                               | )          | (20,023 | ) |
|                                                    |   |             |       |                    |       |                                                      |       |                       |       |                   |       |                                  |       |   |   |
| **Balance at  July 31, 2003**                           |   | **37,418**       | ** ** | **$**                   | **18,709** | ** **                                                | **$**      | **167,696**                | ** ** | **$**                  | **—** | ** **                            | **$**      | **(3,762** | **)** | **$** | **519,171** | ** ** | **$** | **701,814** | ** ** |

 

*See notes to condensed consolidated financialstatements.*

 

4

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                      Basisof Presentation**

 

The accompanying condensed consolidated financial statements includeLongs Drug Stores Corporation (“Longs” or the “Company”) and its wholly ownedsubsidiaries.  All significantinter-company accounts and transactions have been eliminated.  The condensed consolidated financialstatements have been prepared on a basis consistent with the accountingpolicies described in the Annual Report of the Company on Form 10-K for thefiscal year ended January 30, 2003, and reflect all adjustments which are,in management’s opinion, necessary for a fair presentation of the results forthe periods presented.  The condensedconsolidated financial statements as of and for the periods ended July 31, 2003and August 1, 2002 are unaudited.  Thecondensed consolidated balance sheet as of January 30, 2003, and condensedconsolidated statement of stockholders’ equity for the year then ended,presented herein, have been derived from the audited consolidated financialstatements of the Company included in the Form 10-K for the fiscal year endedJanuary 30, 2003.  Certain reclassificationshave been made to prior year financial statements to conform to the currentpresentation. Such reclassifications included a reclassification of advertisingexpenses from operating and administrative expenses to cost of sales.

 

**2.****                                      Stock-BasedCompensation**

 

The Company accounts for stock-based employee compensation using theintrinsic value method in accordance with the provisions of APB Opinion No. 25,*Accountingfor Stock Issued to Employees*, as allowed by SFAS No. 123, *Accountingfor Stock-Based Compensation*. Stock awards are valued at fair market value at the date of grant, andare recorded as compensation expense over the vesting period.  No compensation expense is recognized foremployee stock options, because it is the Company’s practice to grant stockoptions with an exercise price equal to the market price of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123to all stock-based employee compensation:

 
|                                                                                                                                          |   | **13 weeks  ended**                     |   | **26 weeks  ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|---------------------|--------|
|                                                                                                                                          |   | **July 31,  2003**                      |   | **August 1,  2002** |   | **July 31,  2003** |   | **August 1,  2002** |   |
|                                                                                                                                          |   | **Thousands, except per share amounts** |   |
| Net income (loss), as reported                                                                                                                |   | $                                       | 5,260  |                | $      | 10,941 |   | $ | 11,093 |   | $ | (2,714 | ) |
| Add: Stock-based employee compensation expense  included in reported net income (loss), net of related tax effects                            |   | 289                                     |   | 355                 |   | 584 |   | 582 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (1,104                                  | )      | (639                | )      | (2,221 | ) | (1,067 | ) |
| Pro forma net income (loss)                                                                                                                   |   | $                                       | 4,445  |                | $      | 10,657 |   | $ | 9,456 |   | $ | (3,199 | ) |
|                                                                                                                                          |   |                                    |   |                |   |   |   |   |   |
| Basic net income (loss) per share:                                                                                                            |   |                                    |   |                |   |   |   |   |   |
| As reported                                                                                                                                   |   | $                                       | 0.14   |                | $      | 0.29 |   | $ | 0.30 |   | $ | (0.07 | ) |
| Pro forma                                                                                                                                     |   | 0.12                                    |   | 0.28                |   | 0.25 |   | (0.08 | ) |
| Diluted net income (loss) per share:                                                                                                          |   |                                    |   |                |   |   |   |   |   |
| As reported                                                                                                                                   |   | $                                       | 0.14   |                | $      | 0.29 |   | $ | 0.30 |   | $ | (0.07 | ) |
| Pro forma                                                                                                                                     |   | 0.12                                    |   | 0.28                |   | 0.25 |   | (0.08 | ) |

 

5

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**3.****                                      Provisionfor Store Closures and Asset Impairment**

 

The Company periodically reviews store operations and makes decisionsto close stores in the normal course of business.  Costs associated with store closures are recognized when therelated liabilities are incurred.  Suchcosts are included in the provision for store closures and asset impairment, acomponent of operating income. Following is a summary of the Company’s store closure reserves, whichare included in long-term liabilities:

 
|                                                           |   | **26 weeks  ended** |   |
|----------------------------------------------------------------|--------|---------------------|--------|
|                                                           |   | **July 31,  2003**  |   | **August 1,  2002** |   |
|                                                           |   | **Thousands**       |   |
| Store closure reserve, beginning of period                     |   | $                   | 7,826  |   | $ | 12,551 |   |
| Provision for store closures                                   |   | 1,000               |   | — |   |
| Net costs incurred for closed stores, charged  against reserve |   | (773                | )      | (3,185 | ) |
| Store closure reserve, end of period                           |   | $                   | 8,053  |   | $ | 9,366 |   |

 

Substantially all of the Company’s store closure reserves as of July31, 2003 were for lease-related costs associated with closed stores.

 

The Company also reviews long-lived tangible assets and intangibleassets with finite useful lives for impairment whenever events or changes incircumstances indicate that their carrying values may not be recoverable.  Goodwill and other intangible assets withindefinite useful lives are reviewed for impairment annually, or morefrequently if events or changes in circumstances warrant.  Included in the provision for store closuresand asset impairment is a provision of $1.5 million for asset impairmentsrelated to the write-off of abandoned information technology assets.

 

**4.****                                      EarningsPer Share**

 

Basic net income per share is computed by dividing net income by theweighted average number of common shares outstanding during the period.  Diluted net income per share is computed bydividing net income by the weighted average number of common shares anddilutive common equivalent shares (restricted stock awards and stock options)outstanding during the period.  Thefollowing is a reconciliation of the number of shares used in the Company’sbasic and diluted net income per share computations:

###### ** **

|                                                   |   | **13 weeks  ended** |   | **26 weeks  ended** |   |
|--------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                   |   | **July 31,  2003**  |   | **August 1,  2002** |   | **July 31,  2003** |   | **August 1,  2002** |   |
|                                                   |   | **Thousands**       |   |
| Basic weighted average number of shares outstanding    |   | 37,038              |   | 37,907              |   | 37,243 |   | 37,839 |   |
| Effect of dilution from:                               |   |                |   |                |   |   |   |   |   |
| Restricted stock awards                                |   | 170                 |   | 191                 |   | 159 |   | 178 |   |
| Stock options                                          |   | 11                  |   | 136                 |   | 8 |   | 142 |   |
| Diluted weighted average number of shares  outstanding |   | 37,219              |   | 38,234              |   | 37,410 |   | 38,159 |   |

 

The computation of diluted earnings per share excluded 3,581,340 and3,562,945 stock options for the 13-week and 26-week periods ended July 31,2003, respectively, because their effect would have been anti-dilutive.  There were no anti-dilutive options for the13-week and 26-week periods ended August 1, 2002.

 

**5.****                                      MerchandiseInventories**

 

Merchandise inventories are stated at the lower of cost or marketvalue.  Cost is determined using thelast-in, first-out (LIFO) method. The excess of specific cost over LIFO valueswas $174.4 million as of July 31, 2003, $168.7 million as of August 1, 2002 and$171.4 million as of January 30, 2003. LIFO costs for interim financial statements are estimated based onprojected annual inflation rates, inventory levels, and merchandise mix.  Actual LIFO costs are calculated during thefourth quarter of the fiscal year when final inflation rates, inventory levels,and merchandise mix are determined.

 

6

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**6.****                                      Goodwilland Intangible Assets**

 

All of the Company’s goodwill and other intangible assets are includedin the retail drug store segment. Goodwill and other intangible assets with indefinite useful lives arenot amortized, but are subject to impairment testing annually or morefrequently if events and circumstances indicate there may be animpairment.  Intangible assets withfinite useful lives are amortized over those useful lives.  The Company’s intangible assets other thangoodwill include the following:

 
|                                           |   | **Useful  Lives** |   | **Gross  Carrying  Value** |   | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
|------------------------------------------------|--------|-------------------|--------|----------------------------|--------|-------------------------------|--------|--------------------------|--------|
|                                           |   |              |   | **Thousands**              |   |
| **As of July 31, 2003:**                       |   |              |   |                       |   |                          |   |                     |   |
| Intangible assets subject to amortization:     |   |              |   |                       |   |                          |   |                     |   |
| Pharmacy customer lists                        |   | 1-5 years         |   | $                          | 2,393  |                          | $      | (660                     | )      | $ | 1,733 |   |
| Non-compete agreements and other               |   | 2-5 years         |   | 96                         |   | (58                           | )      | 38                       |   |
| Total                                          |   |              |   | 2,489                      |   | (718                          | )      | 1,771                    |   |
| Intangible assets not subject to amortization: |   |              |   |                       |   |                          |   |                     |   |
| Beverage licenses                              |   | N/A               |   | 4,831                      |   | —                        |   | 4,831                    |   |
| Total                                          |   |              |   | $                          | 7,320  |                          | $      | (718                     | )      | $ | 6,602 |   |
|                                           |   |              |   |                       |   |                          |   |                     |   |
| **As of January 30, 2003:**                    |   |              |   |                       |   |                          |   |                     |   |
| Intangible assets subject to amortization:     |   |              |   |                       |   |                          |   |                     |   |
| Pharmacy customer lists                        |   | 1-5 years         |   | $                          | 1,121  |                          | $      | (478                     | )      | $ | 643 |   |
| Non-compete agreements and other               |   | 2-5 years         |   | 91                         |   | (47                           | )      | 44                       |   |
| Total                                          |   |              |   | 1,212                      |   | (525                          | )      | 687                      |   |
| Intangible assets not subject to amortization: |   |              |   |                       |   |                          |   |                     |   |
| Beverage licenses                              |   | N/A               |   | 4,743                      |   | —                        |   | 4,743                    |   |
| Total                                          |   |              |   | $                          | 5,955  |                          | $      | (525                     | )      | $ | 5,430 |   |

 

Amortization expense for intangible assets with finite useful lives was$118 thousand and $193 thousand for the 13-week and 26-week periods ended July31, 2003, respectively.  Estimatedannual amortization expense on these intangibles for fiscal 2004 and each ofthe succeeding four fiscal years is as follows (*in thousands*):

 
| Fiscal Year 2004 |   | $      | 490    |   |
|------------------|--------|--------|--------|--------|
| Fiscal Year 2005 |   | 507    |   |
| Fiscal Year 2006 |   | 367    |   |
| Fiscal Year 2007 |   | 236    |   |
| Fiscal Year 2008 |   | 364    |   |
| Thereafter       |   | — |   |
| Total            |   | $      | 1,964  |   |

 

**7.****                                      Debt**

 

Long-term debt as of July31, 2003 and January 30, 2003 consisted of the following*:*

 
|                                                                                                                                        |   | **July 31,  2003** |    | **January  30,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                                        |   | **Thousands**      |    |
| Unsecured revolving line of credit, interest based  on LIBOR (weighted average rate of****2.86%  as of July 31, 2003), expires October 2004 |   | $                  | 35,000  |                   | $      | 25,000 |   |
| Private placement notes, fixed interest rates  ranging from 5.85% to 7.85%, mature at various dates through 2014                            |   | 156,429            |    | 158,571                |   |
| Other                                                                                                                                       |   | 103                |    | 206                    |   |
| Total long-term debt                                                                                                                        |   | 191,532            |    | 183,777                |   |
| Less current portion                                                                                                                        |   | 4,974              |    | 2,348                  |   |
| Long-term portion                                                                                                                           |   | $                  | 186,558 |                   | $      | 181,429 |   |

 

7

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During the second quarter of fiscal 2004, the Company exercised anoption to increase the borrowing capacity of its unsecured revolving line ofcredit, resulting in a $45 million increase to a total capacity of $195million.  Borrowings on the line ofcredit do not require repayment until the October 2004 expiration date.

 

The Company’s debt agreements contain limits on borrowings andrepurchases of the Company’s stock, and various quarterly financial covenantsthat set maximum leverage ratios and minimum fixed charge and asset coverageratios.  As of July 31, 2003, the Companywas in compliance with the restrictions and limitations included in theseprovisions.

 

**8.****                                      Stockholders’Equity**

 

In February and March 2003, the Company repurchased 853,100 shares ofits common stock at a total cost of $12.0 million to complete a sharerepurchase program authorized by the Board of Directors in November 1999.  In March 2003, the Company’s Board ofDirectors authorized the repurchase of up to 2,000,000 additional shares ofCompany stock through January 2008, for a maximum total expenditure of $50million.  The Company repurchased 509,100shares under the new authorization in March 2003 at a total cost of $8.0million.  The Company did not repurchaseany of its common stock in the 26 weeks ended August 1, 2002.

 

**9.****                                      SegmentInformation**

 

The Company operates in two business segments, retail drug stores andpharmacy benefit management (“PBM”). These segments were identified based on their separate and distinctproducts and services, technology, marketing strategies and managementreporting.  Management evaluates thesegments’ operating performance separately and allocates resources based ontheir respective financial condition, results of operations and cashflows.  Inter-segment transactions andbalances are eliminated in consolidation.

 

Pharmacy is the cornerstone of the retail drug store segment,complemented by such “front-end” categories as over-the-counter medications,health care products, photo and photo processing, cosmetics, greeting cards,food and beverage items, housewares, toiletries, mail centers and seasonalmerchandise.  As of July 31, 2003, theretail drug store segment operated 463 retail stores in six western states andone mail order pharmacy under the names Longs, Longs Drugs, Longs Drug Stores,Longs Pharmacy and American Diversified Pharmacies.

 

The PBM segment, operated through the Company’s RxAmerica subsidiary,contracts with drug manufacturers, third-party health plans and retailpharmacies to provide a range of services to third-party health plan members,including pharmacy benefit plan design and implementation, formularymanagement, claims processing and generic substitution.

 

8

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The following table summarizes significant financial information bysegment as of and for the 13-week and 26-week periods ended July 31, 2003 andAugust 1, 2002:

 
|                |   | **Retail  Drug  Stores** |      | **Pharmacy  Benefit  Management** |   | **Inter-  Segment  Eliminations** |   | **Consolidated  Totals** |   |
|---------------------|--------|--------------------------|-----------|-----------------------------------|--------|-----------------------------------|--------|--------------------------|--------|
|                |   | **Thousands**            |      |
| **13 weeks ended:** |   |                     |      |                              |   |                              |   |                     |   |
| **July 31, 2003:**  |   |                     |      |                              |   |                              |   |                     |   |
| Sales               |   | $                        | 1,102,813 |                              | $      | 6,650                             |   | $                        | — |   | $ | 1,109,463 |   |
| Operating income    |   | 9,376                    |      | 2,627                             |   | —                            |   | 12,003                   |   |
| **August 1, 2002:** |   |                     |      |                              |   |                              |   |                     |   |
| Sales               |   | $                        | 1,096,336 |                              | $      | 5,294                             |   | $                        | — |   | $ | 1,101,630 |   |
| Operating income    |   | 18,533                   |      | 2,236                             |   | —                            |   | 20,769                   |   |
|                |   |                     |      |                              |   |                              |   |                     |   |
| **26 weeks ended:** |   |                     |      |                              |   |                              |   |                     |   |
| **July 31, 2003:**  |   |                     |      |                              |   |                              |   |                     |   |
| Sales               |   | $                        | 2,199,350 |                              | $      | 13,243                            |   | $                        | — |   | $ | 2,212,593 |   |
| Operating income    |   | 19,129                   |      | 5,665                             |   | —                            |   | 24,794                   |   |
| **August 1, 2002:** |   |                     |      |                              |   |                              |   |                     |   |
| Sales               |   | $                        | 2,181,050 |                              | $      | 10,409                            |   | $                        | — |   | $ | 2,191,459 |   |
| Operating income    |   | 37,227                   |      | 4,092                             |   | —                            |   | 41,319                   |   |
|                |   |                     |      |                              |   |                              |   |                     |   |
| **Total assets:**   |   |                     |      |                              |   |                              |   |                     |   |
| July 31, 2003       |   | $                        | 1,292,905 |                              | $      | 55,549                            |   | $                        | (1,570 | ) | $ | 1,346,884 |   |
| August 1, 2002      |   | 1,284,748                |      | 32,914                            |   | (673                              | )      | 1,316,989                |   |
| January 30, 2003    |   | 1,299,967                |      | 53,710                            |   | (1,606                            | )      | 1,352,071                |   |

 

Consolidated total sales include the following product and servicetypes:

 
|                                 |   | **13 weeks  ended** |      | **26 weeks  ended** |   |
|--------------------------------------|--------|---------------------|-----------|---------------------|--------|
|                                 |   | **July 31,  2003**  |      | **August 1,  2002** |   | **July 31,  2003** |   | **August 1,  2002** |   |
|                                 |   | **Thousands**       |      |
| Pharmacy sales                       |   | $                   | 515,252   |                | $      | 486,826 |   | $ | 1,029,481 |   | $ | 984,786 |   |
| Front-end sales                      |   | 587,561             |      | 609,510             |   | 1,169,869 |   | 1,196,264 |   |
| Pharmacy benefit management revenues |   | 6,650               |      | 5,294               |   | 13,243 |   | 10,409 |   |
| Consolidated total sales             |   | $                   | 1,109,463 |                | $      | 1,101,630 |   | $ | 2,212,593 |   | $ | 2,191,459 |   |

 

9

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**Item2****.****                              *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

*Thisquarterly report contains certain forward-looking statements within the meaningof Section 27A of the Securities Act and Section 21E of the Securities ExchangeAct.  Such statements relate to, amongother things, pharmacy and front-end sales trends, prescription margins, marginimprovement, cost reductions, changes in supply chain practices, inflationrates, workers’ compensation costs, the number of store openings and the levelof capital expenditures, and are indicated by words or phrases such as“continuing,” “expects,” “estimates,” “believes,” “plans,” “anticipates,”“will,”  and other similar words orphrases.  These statements are based onour current plans and expectations and involve risks and uncertainties thatcould cause actual events and results to vary materially from those included inor contemplated by such statements. These risks and uncertainties include, but are not limited to, changesin economic conditions generally or in the markets we serve; consumerpreferences and spending patterns; economic softness and unemployment; theimpact of state budget deficits on government healthcare spending and economicconditions generally; competition from other drugstore chains, supermarkets, on-lineretailers, other retailers and mail order companies; changes in state orfederal legislation or regulations; the efforts of third-party payers to reduceprescription drug costs; the success of planned advertising and merchandisingstrategies; the availability and cost of real estate for, and construction of,new stores; accounting policies and practices; our ability to hire and retainpharmacists and other store and management personnel; our relationships withour suppliers; our ability to improve our purchasing of front-end products; ourability to successfully implement new computer systems and technology; ourability to obtain adequate insurance coverage; the effect of war and terrorismon economic conditions and consumer spending patterns; the impact of risingenergy costs on our operations; changes in internal business processesassociated with supply chain and other initiatives; adverse determinations withrespect to litigation or other claims; and other factors discussed in thisquarterly report under “Risk Factors” and elsewhere or in any of our other SECfilings.  We assume no obligation toupdate our forward-looking statements to reflect subsequent events orcircumstances.*

 

**RESULTS OF OPERATIONS**

 

***Sales***

 
|                                                 |   | **13 weeks  ended** |      | **26 weeks  ended** |   |
|------------------------------------------------------|--------|---------------------|-----------|---------------------|--------|
|                                                 |   | **July 31,  2003**  |      | **August 1,  2002** |   | **July 31,  2003** |   | **August 1,  2002** |   |
|                                                 |   |                |      |                |   |   |   |   |   |
| Sales *(Thousands)*                                  |   | $                   | 1,109,463 |                | $      | 1,101,630 |   | $ | 2,212,593 |   | $ | 2,191,459 |   |
| Sales Growth over Same Period in Previous Year       |   | 0.7                 | %         | 5.7                 | %      | 1.0 | % | 5.7 | % |
| Same-Store Sales (Decline) Growth                    |   | (1.9                | )%        | 3.3                 | %      | (1.3 | )% | 3.8 | % |
| Impact of New Stores/Closed Stores on Sales Growth   |   | 2.5                 | %         | 1.9                 | %      | 2.2 | % | 1.4 | % |
| Impact of PBM Revenues on Sales Growth               |   | 0.1                 | %         | 0.5                 | %      | 0.1 | % | 0.5 | % |
|                                                 |   |                |      |                |   |   |   |   |   |
| Pharmacy Sales Growth                                |   | 5.8                 | %         | 7.0                 | %      | 4.5 | % | 8.1 | % |
| Same-Store Pharmacy Sales Growth                     |   | 2.8                 | %         | 5.9                 | %      | 2.3 | % | 7.1 | % |
| Pharmacy as a % of Total Retail Drug Store Sales     |   | 46.7                | %         | 44.4                | %      | 46.8 | % | 45.2 | % |
| % of Pharmacy Sales Paid by Third Party Health Plans |   | 90.0                | %         | 91.1                | %      | 90.5 | % | 90.9 | % |
|                                                 |   |                |      |                |   |   |   |   |   |
| Front-End Sales (Decline) Growth                     |   | (3.6                | )%        | 3.8                 | %      | (2.2 | )% | 2.9 | % |
| Same-Store Front-End Sales (Decline) Growth          |   | (5.6                | )%        | 1.4                 | %      | (4.3 | )% | 1.2 | % |
| Front-End as a % of Total Retail Drug Store Sales    |   | 53.3                | %         | 55.6                | %      | 53.2 | % | 54.8 | % |
|                                                      |        |                     |           |                     |        |  |  |  |  |  |  |  |  |

 

*Thirteen Weeks Ended July 31, 2003versus Thirteen Weeks Ended August 1, 2002*

 

Sales increased 0.7% in the second quarter of fiscal 2004 (ended July31, 2003) over the same quarter in fiscal 2003.  Growth in the number of stores accounted for 2.5% of total salesgrowth, offset by a 1.9% decrease in same-store sales. Growth in revenues atRxAmerica, our pharmacy benefit management (“PBM”) subsidiary, contributed theremaining 0.1% of total sales growth in the quarter.

 

10

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Pharmacy sales increased 5.8% in the second quarter over the samequarter last year, with same-store pharmacy sales increasing 2.8%.  Pharmacy sales were 46.7% of total retaildrug store sales in the second quarter of fiscal 2004, compared to 44.4% in thesame quarter of fiscal 2003.  We expectpharmacy sales to continue to increase as a percentage of total retail drugstore sales as pharmacy sales continue to increase faster than front-end sales.

 

Prescription volumes decreased in the second quarter of fiscal 2004compared to the same quarter last year as a result of the conversion of theallergy drug Claritin from prescription to over-the-counter status in additionto health concerns over women’s hormone replacement therapy drugs.  Continued sluggish economic growth andhigher patient co-payments under some insurance plans also had a negativeimpact on prescription volumes.

 

The average retail price per prescription increased 6.4% over thesecond quarter of fiscal 2003.  Thisincrease was lower than in previous years primarily due to the recentintroduction of several lower-priced high-volume generic drugs.  Increased generic utilization negativelyimpacted same-store pharmacy sales by approximately 1.3% in the quarter.  We expect that average retail prices forprescription drugs will continue to rise. While we expect that generic utilization will continue to besignificant, its rate of growth has declined, and therefore the impact on ourpharmacy same-store sales will also continue to decline.

 

Third-party health plans covered approximately 90% of our pharmacysales in the second quarter of fiscal 2004, compared to approximately 91% inthe same quarter last year.  We expectthird-party sales to remain at or near 90% of our total pharmacy sales for theforeseeable future due to significant consumer participation in managed careand other third-party plans.

 

Front-end sales decreased 3.6% from the second quarter of last year,with same-store front-end sales decreasing 5.6%.  Economic weakness and high unemployment, particularly inCalifornia, continued to adversely affect our front-end sales.  In addition, we have experienced a declinein sales in our photo category, primarily due to consumers’ continued migrationto digital photography technology. Further, price reductions in certain high volume items in categoriessuch as health and beauty care, over-the-counter medications and conveniencegrocery also contributed to the front-end sales decrease.

 

*Twenty-Six Weeks Ended July 31, 2003versus Twenty-Six Weeks Ended August 1, 2002*

 

Sales increased 1.0% in the first six months of fiscal 2004 (ended July31, 2003) over the same period in fiscal 2003. Growth in the number of stores accounted for 2.2% of total sales growth,offset by a 1.3% decrease in same-store sales. Growth in revenues at RxAmericacontributed the remaining 0.1% of total sales growth in first six months offiscal 2004.

 

Pharmacy sales increased 4.5% in the first six months of fiscal 2004over the same period last year, with same-store pharmacy sales increasing2.3%.  Pharmacy sales were 46.8% oftotal drug store sales in the first six months of fiscal 2004, compared to45.2% in the same period last year.

 

Prescription volumes decreased in the first six months of fiscal 2004from the same period last year as a result of the conversion of the allergydrug Claritin from prescription to over-the-counter status, health concernsover women’s hormone replacement therapy drugs, continued sluggish economicgrowth, and higher patient co-payments under some insurance plans.  The average retail price per prescriptionincreased 5.9% over the first six months of fiscal 2003.  Increased generic utilization negativelyimpacted same-store pharmacy sales by approximately 1.7% in the first sixmonths of fiscal 2004.

 

Front-end sales decreased 2.2% from the first six months of last year,with same-store front-end sales decreasing 4.3%. Factors contributing to thedecrease in front-end sales include economic weakness and high unemployment,particularly in California, uncertainties related to the war in Iraq, a declinein our photo category, and price reductions in certain high volume items.

 

11

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***Gross Profit***

 
|                         |   | **13 weeks  ended** |    | **26 weeks  ended** |   |
|------------------------------|--------|---------------------|---------|---------------------|--------|
|                         |   | **July 31,  2003**  |    | **August 1,  2002** |   | **July 31,  2003** |   | **August 1,  2002** |   |
|                         |   |                |    |                |   |   |   |   |   |
| Gross Profit *(Thousands)*   |   | $                   | 288,039 |                | $      | 284,262 |   | $ | 573,146 |   | $ | 560,289 |   |
| Gross Profit as a % of Sales |   | 26.0                | %       | 25.8                | %      | 25.9 | % | 25.6 | % |
| LIFO Provision *(Thousands)* |   | $                   | 1,000   |                | $      | 1,700 |   | $ | 3,000 |   | $ | 3,400 |   |

 

*Thirteen Weeks Ended July 31, 2003versus Thirteen Weeks Ended August 1, 2002*

 

Gross profit was 26.0% of sales in the second quarter of fiscal 2004,compared to 25.8% in the same quarter last year.  Pharmacy and front-end gross profits benefited from better buyingpractices and opportunities resulting from our progress in centralizingprocurement, advertising and promotional activities as part of our initiativeto upgrade our supply chain practices. The increased usage of generic drugs, which generally have higher grossprofit percentages than name-brand drugs, also contributed to higher pharmacygross profit percentages. While we expect that generic utilization willcontinue to be significant, its rate of growth has declined and therefore theimpact on our gross profit will also continue to decline.

 

Approximately 90% of our pharmacy sales are wholly or partiallyreimbursed by third-party health plans, which have lower gross profitpercentages than non third-party sales. Third-party health plans continue to reduce the levels at which theyreimburse us for the prescription drugs that we provide to their members,resulting in pressure on pharmacy gross profits.  Pharmacy sales also have lower gross profit percentages thanfront-end sales, and as pharmacy sales continue to grow as a percent of totalsales, overall gross profit percentages will be adversely impacted.

 

Our promotional sales increased as a percentage of total front-endsales in the second quarter of fiscal 2004 over the same quarter lastyear.  Promotional sales have lowergross profit percentages than non-promotional sales.  We expect that our promotional sales will continue to be asignificant portion of our total front-end sales in light of persistentsoftness in the economy and promotional activities by our competitors,resulting in pressure on our front-end gross profits.

 

Our gross profit included LIFO provisions of $1.0 million in the secondquarter of fiscal 2004 and $1.7 million in the same quarter last year, includedin cost of sales.  The LIFO provisionfluctuates with inflation rates, inventory levels and merchandise mix.  We estimate LIFO costs for interim financialstatements based on projected annual inflation rates, inventory levels, andmerchandise mix.  We calculate actualLIFO costs during the fourth quarter of the fiscal year when we determine finalinflation rates, inventory levels, and merchandise mix.

 

In the first quarter of fiscal 2004, we began classifying advertisingexpenses as a component of cost of sales. Previously, we classified advertising expense as a component ofoperating and administrative expenses. We reclassified results for the second quarter of fiscal 2003 to conformto this new presentation, resulting in a $5.4 million increase in cost of salesand an offsetting decrease in previously reported operating and administrativeexpenses, with no effect on reported net income.

 

*Twenty-Six Weeks Ended July 31, 2003versus Twenty-Six Weeks Ended August 1, 2002*

 

Gross profit was 25.9% of sales in the first six months of fiscal 2004,compared to 25.6% in the same period last year.  The increase in the gross profit for pharmacy and front-end isattributable to better buying practices and opportunities resulting from ourprogress in centralizing procurement, advertising and promotional activities aspart of our initiative to upgrade our supply chain practices, and the increasedusage of generic drugs, offset by an increase in our promotional sales as apercentage of total front-end sales over the same period last year.

 

Our gross profit included LIFO provisions of $3.0 million in the firstsix months of fiscal 2004 and $3.4 million in the same period of fiscal 2003,included in cost of sales.

 

12

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The reclassification of advertising expenses as a component of cost ofsales rather than operating and administrative expenses resulted in an increaseof $11.1 million in previously reported cost of sales and an offsettingdecrease in previously reported operating and administrative expenses for the26 weeks ended August 1, 2002, with no effect on reported net income.

 

***Operating and Administrative Expenses***

 

*Thirteen Weeks Ended July 31, 2003versus Thirteen Weeks Ended August 1, 2002*

 

Operating and administrative expenses were 22.7% of sales in the secondquarter of fiscal 2004, compared to 22.1% in the same quarter last year.  In July 2003, we announced a voluntaryseparation program for store managers. Operating and administrative expenses in the second quarter of fiscal2004 include a charge of $3.7 million, or 0.3% of sales, for the employee terminationand related costs of this program.  Weexpect to pay these costs over the next four fiscal quarters.

 

Workers’ compensation and other insurance-related expenses increased$3.8 million, or 0.3% of sales, in the second quarter over the same quarter lastyear.  The increase in workers’compensation expenses was primarily due to regulatory changes in our principalmarkets and higher health care costs, particularly in California.  We expect that rising medical costs andchanges in the regulatory environment will continue to drive workers’compensation claim costs higher in the near future.  However, we are continuing to develop our existing workplacesafety practices in an effort to partially mitigate this increase in costs overtime by reducing the number of workers’ compensation claims.

 

As previously noted, the increased usage of lower-priced generic drugshad a negative impact on our sales. This in turn resulted in higher operating and administrative expenseswhen measured as a percent of sales, but increased gross profitpercentages.  We estimate that thehigher generic utilization resulted in an increase of approximately 0.1% inoperating and administrative expenses as a percent of sales in the secondquarter compared to the same quarter last year.

 

These increases in operating and administrative expenses were partiallyoffset by a $2.0 million (0.2% of sales) net gain on the disposition of certainproperties.

 

*Twenty-Six Weeks Ended July 31, 2003versus Twenty-Six Weeks Ended August 1, 2002*

 

Operating and administrative expenses were 22.7% of sales in the firstsix months of fiscal 2004, compared to 21.9% in the same period last year.  In February 2003, we announced a series ofsteps designed to reduce our operating and administrative expenses as a percentof sales in the future.  These stepsincluded a reduction of our administrative workforce by approximately 170people in our California offices, the closure of certain support facilities,store labor savings through workflow and staffing changes and a restructuringof our incentive compensation arrangements. The employee termination, facility closure and other related costs ofthese activities and of the voluntary separation program for store managersannounced in July 2003 totaled $7.1 million, or 0.3% of sales, in the first sixmonths of fiscal 2004.

 

Insurance-related expenses, including workers’ compensation, increased$7.7 million, or 0.3% of sales, for the first six months of fiscal 2004 overthe same period last year.  We estimatethat increased generic utilization resulted in an increase of approximately0.2% in operating and administrative expenses as a percent of sales in thefirst six months of fiscal 2004 compared to the same period last year.

 

These increases in operating and administrative expenses for the firstsix months of fiscal 2004 were partially offset by a $3.0 million (0.1% ofsales) net gain on the disposition of certain properties.

 

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***Depreciation and Amortization***

 

Depreciation and amortization expenses were $21.9 million and $43.7million in the second quarter and first six months of fiscal 2004, compared to$19.2 million and $38.1 million in the same periods of fiscal 2003.  The increase was primarily due toaccelerated depreciation of $2.6 million and $5.2 million in the second quarterand first six months of fiscal 2004 arising from the abandonment of a pharmacyinformation system.

 

***Provision for Store Closures and AssetImpairment***

 

In the second quarter of fiscal 2004 we recorded a provision of $1.0million for store closures related to the default of a sublease tenant in aclosed store location.  We have notclosed any stores in the first six months of fiscal 2004.  We also recorded a provision of $1.5 millionfor asset impairments related to the write-off of abandoned informationtechnology assets.

 

***Legal Settlements and Other Disputes***

 

In the secondquarter of fiscal 2003, we recorded a net charge of $0.5 million for thesettlement of certain legal matters. These matters were settled in earlierfiscal years, and as final payments were made during the second quarter offiscal 2003, we incurred additional net costs over those previously estimated.

 

***Net Interest Expense***

 

Net interest expense was $3.6 million and $7.0 million in the secondquarter and first six months of fiscal 2004, compared to $3.1 million and $6.1million in the same periods last year. The increase was due to higher average borrowings, partially offset bylower interest rates.

 

***Income Taxes***

 

Our effective income tax rate was 37.6% in the second quarter and firstsix months of fiscal 2004, compared to 38.0% and 37.8% in the same periods offiscal 2003. We expect our effective income tax rate to be approximately 37.6%for the remainder of fiscal 2004.

 

***Cumulative Effect of Accounting Change***

 

As a result of adopting SFAS No. 142, *Goodwill and Other Intangible Assets*,we recognized a goodwill impairment charge of $41.0 million ($24.6 millionafter tax or $0.65 per diluted share) in the first quarter of fiscal 2003 asthe cumulative effect of a change in accounting principle.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

***General***

 

Our primary sources of liquidity are operating cash flows andborrowings on our line of credit.  We usecash to provide working capital for our operations, finance capitalexpenditures and acquisitions, repay debt, pay dividends and repurchase sharesof our common stock.

 

We have an unsecured revolving line of credit with a syndication ofbanks, which expires in October 2004 and accrues interest at LIBOR-basedrates.  During the second quarter offiscal 2004, we exercised an option to increase the borrowing capacity of thiscredit facility, resulting in a $45 million increase to a total capacity of$195 million.  Borrowings on the line ofcredit do not require repayment until the October 2004 expiration date.  As of July 31, 2003, $35 million wasoutstanding under this line of credit with a weighted average interest rate of2.86%.

 

Additionally, as of July 31, 2003, we have $156.4 million in privatelyplaced promissory notes.  These notesmature at various dates through 2014 and bear interest at fixed rates rangingfrom 5.85% to 7.85%.  The notes includepenalties for repayment prior to their scheduled maturities.

 

Our debt agreements contain limits on borrowings and repurchases ofcompany stock, and various quarterly financial covenants that set maximumleverage ratios and minimum fixed charge and asset coverage ratios.  During the first quarter of fiscal 2004, weamended our unsecured revolving line of credit agreement to revise certainfinancial covenants and limitations and increase our maximum allowablerepurchases of company stock.  As ofJuly 31, 2003, we were in compliance with the restrictions and limitationsincluded in these provisions.

 

We believe that cash on hand, together with cash provided by operatingactivities and borrowings on our line of credit, will be sufficient to meet ourworking capital, capital expenditure and debt service requirements beyond thenext 12 months.

 

***Operating Cash Flows***

 

Net cash provided by operating activities was $98.1 million in thefirst half of fiscal 2004, compared to net cash used in operating activities of$5.4 million in the same period of fiscal 2003.  The increase in operating cash flows was primarily due to changesin inventories and current liabilities.

 

During the first half of fiscal 2004, inventories decreased $34.4million from the end of fiscal 2003. In-store inventories decreased, partially offset by higher distributioncenter inventories, reflecting our progress in centralizing procurement anddistribution.  Average LIFO inventoriesper store decreased from $975,000 to $883,000, or 9.3% (6.7% excluding LIFO reserves).

 

During the first half of fiscal 2003, inventories increased $16.7million and current liabilities decreased $59.0 million compared to the end offiscal 2002.  The increase ininventories was partially due to the growth in the number of our stores, inaddition to forward purchases of merchandise in order to take advantage offavorable pricing opportunities.  Thedecrease in current liabilities was due to the payment of income and salestaxes as well as the resolution of a payment dispute with a vendor thatresulted in the payment of amounts that were included in accounts payable as ofthe end of fiscal 2002.

 

Working capital, defined as current assets less current liabilities,was $227.7 million as of July 31, 2003, $240.0 million as of August 1, 2002,and $242.6 million as of January 30, 2003. We reduced working capital by $23 million on an equivalent store basisfrom the end of the second quarter last year and $19 million from the end offiscal 2003.  These reductions inworking capital have come primarily from inventory reductions resulting fromour progress in centralizing procurement and distribution, and increases inaccounts payable due to renegotiated payment terms with our vendors.  We plan to reduce our working capital byapproximately $50 million on an equivalent-store basis by the end of fiscal2004, as compared to the end of fiscal 2003.

 

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***Investing Cash Flows***

 

Net cash used in investing activities was $50.0 million in the firsthalf of fiscal 2004, compared to $45.6 million in the same period of fiscal2003.  Investing activities primarilyconsist of capital expenditures for new stores, store improvements, technologyand supply chain improvements, partially offset by cash receipts from propertydispositions.  In the first half offiscal 2004, investing cash outflows also included the acquisition of AmericanDiversified Pharmacies (ADP), a mail service pharmacy.

 

We opened 8 new stores in the first half of fiscal 2004 compared to 11new stores, offset by 5 closed stores, in the same period last year.  We plan to open 11 new stores and to remodelapproximately 20 existing stores in the third and fourth quarters of fiscal2004.  We expect net capital expendituresin fiscal 2004 to be approximately $110 million to $120 million, primarily fornew store investments, remodels and improvements to existing stores, technologyand supply chain improvements, including expenditures under the supply chainprogram discussed further below.  Inaddition, in the ordinary course of business we may acquire stores,store-related assets including pharmacy customer lists, or other complementarybusinesses.

 

In February 2002, our board of directors approved a program forupgrading our supply chain practices in an effort to increase efficiency andenhance profitability.  Over the term ofthis program (February 2002 through expected completion in fiscal year 2006),we expect to spend approximately $60 million in capital additions for supplychain improvements, largely related to systems changes.  Since inception of the program, we havespent approximately $22 million in capital additions.

 

***Financing Cash Flows***

 

Net cash used in financing activities was $22.8 million in the firsthalf of fiscal 2004, compared to $25.2 million in the same period of fiscal2003.  Our financing activities consistof long-term borrowings and repayments, repurchases of common stock anddividend payments.

 

In the first half of fiscal 2004, proceeds from borrowings on ourunsecured revolving line of credit were $10 million.  We used these borrowings, together with cash flows fromoperations, to finance capital expenditures, stock repurchases and dividend payments.  We also repaid $2.2 million of long-term borrowings, consistingprimarily of regularly scheduled principal payments on our private placementnotes.  In the first half of fiscal2003, we repaid $14.4 million of long-term borrowings, including $12.0 millionon our line of credit and regularly scheduled principal payments of $2.4million, primarily on our private placement notes.

 

In February and March 2003, we repurchased 853,100 shares of our commonstock at a total cost of $12.0 million to complete a share repurchase programauthorized by our board of directors in November 1999.  In March 2003, our board of directorsauthorized the repurchase of up to 2,000,000 additional shares of our commonstock through January 2008, for a maximum total expenditure of $50million.  We repurchased 509,100 sharesunder the new authorization in March 2003 at a total cost of $8.0 million.  Any future repurchase of our common stockwill depend on existing market conditions, our financial position, and othercapital requirements.

 

Our board of directors makes decisions about the declaration ofquarterly dividends after reviewing our results of operations and financialposition.  We paid dividends of $0.28per share, or $10.5 million and $10.7 million, respectively, in the first halfof fiscal 2004 and 2003.

 

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**RISKFACTORS**

 

You should carefully read the following riskfactors.

 

**Continued economic softness couldcontinue to adversely affect consumer-buying practices and reduce our sales andprofitability.**

 

A sluggish economy has adversely affected oursales and operating profitability for the past two fiscal years.  The economy is very soft in many of themarkets we serve, particularly California, and consumer confidence is low.  If the economy remains soft or slows further,or if unemployment increases, our pharmacy sales could be adversely affected asconsumers may lose their health insurance due to unemployment.  Further, if economic conditions, war,terrorism or other global concerns continue to worry consumers, they maycontinue to decrease their purchases, particularly of products other than pharmaceuticalproducts.  We make a higher profit onour sales of front-end products than we do on sales of pharmaceuticalproducts.  Therefore, any continueddecrease in our sales of front-end products would decrease our profitability.

 

**The retail drug store and pharmacybenefit management industries are highly competitive, and further increases incompetition could adversely affect us.**

 

We face intense competition with local,regional and national companies, including other drug store chains, independentdrug stores, mail order pharmacies, on-line retailers, supermarket chains and,increasingly, mass merchandisers.  Inthe PBM industry, our competitors include large national and regional PBMs,some of which are owned by our retail drug store competitors.  Many of our competitors have substantiallygreater resources, including name recognition and capital resources, than wedo.  As competition increases in themarkets in which we operate, a significant increase in general pricingpressures could occur, which could require us to reduce prices, purchase moreeffectively and increase customer service to remain competitive.  We cannot assure you that we will be able tocontinue to compete effectively in our markets or increase our sales volume ormargins in response to further increased competition.

 

**Our ability to successfully implementsignificant organizational changes, including supply chain improvements, iscritical to the ongoing success of our business.**

 

We are currently undertaking significantorganizational changes, including store workflow and staffing changes,increased centralization, restructured incentive compensation arrangements andother strategic initiatives.  Inaddition, in February 2002 our board of directors approved a program to upgradeour supply chain practices in an effort to increase efficiency and enhanceprofitability.  Over the term of thisprogram (February 2002 through expected completion in fiscal year 2006) weexpect to spend approximately $60 million in capital additions for supply chainimprovements, largely related to systems changes.  Since inception of the program, we have spent approximately $22million in capital additions.  Mostrecently, our program to upgrade our supply chain practices included theimplementation of new distribution management software in one of our front-enddistribution centers.  Such systemsimplementations are complex and could adversely affect our sales, gross profitand operating and administrative expenses.

 

Our ability to successfully implement theseorganizational changes, which are significant to our operations and businesspractices, is critical to our future profitability.  We cannot assure you that we will be able to execute theseinitiatives successfully and without significant disruption to our business.  If we are not successful, we will have spentsignificant capital and human effort and may not achieve any of the expectedbenefits from these initiatives.

 

**Changes in third-party reimbursementlevels for prescription drugs continue to reduce our margins on pharmacy salesand could have a material adverse effect on our overall performance.**

 

We are wholly or partially reimbursed bythird-party health plans for approximately 90% of all the prescription drugsthat we sell.  Pharmacy sales reimbursedby third parties, including Medicare and Medicaid plans, have lower grossmargins than non third-party pharmacy sales. Third-party health plans continue to reduce the levels at which theyreimburse us for the prescription drugs that we provide to their members.  Furthermore, Medicare reform initiatives mayinclude prescription drug benefits.  Ifthird-party health plans continue to reduce their reimbursement levels, or ifMedicare covers prescription drugs at reimbursement levels lower than ourcurrent retail prices, our margins on these sales will continue to be reduced,and our profitability will be adversely affected.

 

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**Our ability to attract and retainpharmacy personnel or develop alternate fill sources is important to thecontinued success of our business.**

 

Our industry is continuing to experience ashortage of licensed pharmacists in the markets in which we operate.  Our inability to attract and retainpharmacists and other key personnel could adversely affect us.  In order to mitigate this risk we enteredinto a joint venture agreement with AmerisourceBergen to operate a centralprescription fill center.  The successof this fill center, which cannot be assured, is important to our ability toaddress the shortage of pharmacists, but additional efforts may be necessary toaddress this business issue.  Otheroptions may be costly or unavailable to us. Further, a significant disruption in our fill center’s operations couldworsen the effects of the pharmacist shortage and adversely affect ourbusiness.

 

**We are substantially dependent on asingle supplier of pharmaceutical products to sell products to us onsatisfactory terms.  A disruption in ourrelationship with this supplier could have a material adverse effect on ourbusiness.**

 

We obtain approximately half of our totalmerchandise, including over 90% of our pharmaceuticals, from a single supplier,AmerisourceBergen, with whom we have a long-term supply contract.  Any significant disruptions in our relationshipwith AmerisourceBergen, or deterioration in AmerisourceBergen’s financialcondition, could have a material adverse effect on us.

 

**We are subject to governmentalregulations, procedures and requirements. Our noncompliance with, or a significant change in, these regulationscould have a material adverse effect on us.**

 

Our pharmacy business is subject to numerousfederal, state and local regulations, many of which are new anddeveloping.  These include localregistrations of pharmacies in the states where our pharmacies are located andapplicable Medicare and Medicaid regulations. In addition, the Health Insurance Portability and Accountability Act(“HIPAA”) imposes certain requirements regarding the protection of confidentialpatient medical records and other information. Compliance with these regulations, particularly HIPAA, requires that weimplement complex changes to our systems and processes.  Failure to adhere to these and otherapplicable regulations could result in the imposition of civil and criminalpenalties.  Furthermore, any new federalor state regulations or reforms, including healthcare reform initiatives orpharmacy benefit management regulation, could adversely affect us.

 

**Certain risks are inherent inproviding pharmacy services, and our insurance may not be adequate to cover anyclaims against us.**

 

Pharmacies are exposed to risks inherent inthe packaging and distribution of pharmaceuticals and other healthcareproducts.  Although we maintainprofessional liability and errors and omissions liability insurance, we cannotassure you that the coverage limits under our insurance programs will beadequate to protect us against future claims, or that we will be able tomaintain this insurance on acceptable terms in the future.

 

**Continued volatility in insurancerelated expenses and the markets for insurance coverage could have a materialadverse affect on us.**

 

The costs of employee health, workers’compensation, property and casualty, general liability, director and officerand other types of insurance have continued to rise, while the amount andavailability of coverage have decreased. Claims costs for workers’ compensation and other self-insured exposureshave also increased.  In the secondquarter of fiscal 2004, for example, our insurance-related expenses, increased$3.8 million, or 0.3% of sales, over the same quarter last year.  These conditions have been exacerbated byrising health care costs, legislative changes, economic conditions and terrorism.  If our insurance-related costs continue toincrease significantly, or if we are unable to obtain adequate levels ofinsurance, our financial position and results of operations could be adverselyaffected.

 

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**Our geographic concentration in thewestern United States presents certain risks that could adversely affect us.**

 

Our stores, distribution centers andcorporate offices are located in the western United States.  Risks prevalent in this region include, butare not limited to, major earthquakes, periodic energy shortages and risingenergy costs, and shipping and other transportation-related disruptions.  For example, last year’s work stoppage atCalifornia ports caused us to purchase inventory for the holiday season beforewe otherwise would have done so. Because of our geographic concentration, these risks could result insignificant disruptions to our business or increased operating expenses.

 

**Item3****.*****                Quantitativeand Qualitative Disclosures of Market Risk***

 

Our major market risk exposure is changing interest rates.  We use debt financing in combination withoperating cash flows to support capital expenditures, acquisitions, workingcapital needs and general corporate purposes. Our unsecured revolving line of credit ($35 million as of July 31, 2003)bears interest at LIBOR-based rates, and therefore an increase in interestrates could increase our interest expense. We do not currently undertake any specific actions to cover our exposureto interest rate risk and we are not currently a party to any interest raterisk management transactions.  We havenot purchased and do not currently hold any derivative financialinstruments.  Depending on the interestrate environment and subject to approval by our board of directors, we may makeuse of derivative financial instruments or other interest rate managementvehicles in the future.

 

A 10% change in interest rates (29 basis points on our floating-ratedebt as of July 31, 2003) would have an immaterial effect on our earnings andcash flows and on the fair value of our fixed rate debt.

 

**Item 4****.****                *Controls andProcedures***

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to the Company’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

 

As of July 31, 2003, the end of the quarter covered by this report, theCompany carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were effectiveat the reasonable assurance level.

 

There have been no changes in the Company’s internal controls overfinancial reporting that occurred during the fiscal quarter covered by thisquarterly report that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 

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**PARTII****– OTHERINFORMATION**

 

**Item4.****                              Submission of Matters to a Vote of Security Holders**

 

(a)                                  OnMay 20, 2003, we held our annual meeting of stockholders in Walnut Creek,California.

 

(b)                                 Thefollowing directors were elected at the annual meeting:

 
|             |   | **Votes in  favor** |   | **Votes  withheld** |   |
|------------------|--------|---------------------|--------|---------------------|--------|
| W.F. Bryant      |   | 24,128,317          |   | 8,012,679           |   |
| M.H. Dashe       |   | 24,400,581          |   | 7,740,415           |   |
| M.S. Metz        |   | 19,573,597          |   | 12,567,399          |   |
| A.G. Wagner      |   | 19,592,866          |   | 12,548,130          |   |
| D.E.  Knapp |   | 23,078,386          |   | 9,062,610           |   |

 

There were no abstentions and no brokernon-votes.  Other directors whose termsof office as directors continued after the annual meeting are:

 

W.L Chenevich

L.T. Barnes

R.M. Long

R.A. Plomgren

H.R. Somerset

D.L. Sorby

F.E. Trotter

 

 

(c)                                  Othermatters voted upon at the annual meeting were as follows:

 

Approval of the 2003 Executive Incentive Plan:

 
| Votes in favor   |   | 21,130,032 |   |   |   |
|------------------|--------|------------|--------|--------|--------|
| Votes withheld   |   | 10,173,516 |   |   |   |
| Votes abstaining |   | 837,448    |   |   |   |

 

Approval of Amended and Restated 1995 Long-TermIncentive Plan:

 
| Votes in favor   |   | 19,389,362 |   |   |   |
|------------------|--------|------------|--------|--------|--------|
| Votes withheld   |   | 11,846,636 |   |   |   |
| Votes abstaining |   | 904,998    |   |   |   |

 

Ratification of Deloitte & Touche LLP asindependent auditors for the fiscal year ending January 29, 2004:

 
| Votes in favor   |   | 21,082,618 |   |   |   |
|------------------|--------|------------|--------|--------|--------|
| Votes withheld   |   | 10,578,329 |   |   |   |
| Votes abstaining |   | 480,049    |   |   |   |

 

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**Item6****.****                              Exhibitsand Reports on Form 8-K**

 

(d)                                 Exhibits

 

Exhibit 10.1                      Longs DrugStores Corporation 2003 Executive Incentive Plan, as approved by stockholderson May 20, 2003.

 

Exhibit 10.2                      Amendment tothe Longs Drug Stores Corporation 1995 Long-Term Incentive Plan, as approved bystockholders on May 20, 2003.

 

Exhibit 10.3:      Employment agreement between Longs DrugStores California, Inc. and Richard W. Dreiling, Executive Vice President,Chief Operations Officer, dated July 8, 2003.

 

Exhibit 10.4:      Form of Agreement for Termination Benefitsin the Event of a Change in Corporate Control between Longs Drug StoresCalifornia, Inc. and employees at a Senior Vice President level or above.

 

Exhibit 10.5:      Form of Retention Agreement between LongsDrug Stores California, Inc. and employees at a Senior Vice President level orabove.

 

Exhibit 31:                            Certificationof the Chief Executive Officer and the Chief Financial Officer of Longs DrugStores Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

Exhibit 32:                            Certificationof the Chief Executive Officer and the Chief Financial Officer of Longs DrugStores Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

*These certifications are being furnished solely toaccompany this quarterly report pursuant to 18 U.S.C. §1350, and are not beingfiled for purposes of Section 18 of the Securities Exchange Act of 1934, asamended, and are not to be incorporated by reference to any filing of the Company,whether made before or after the date hereof, regardless of any generalincorporation language in such filing.

 

(e)                                  Reportson Form 8-K

 

On May 13, 2003, we filed a Current Report on Form 8-Kregarding our March 2003 sales results.

 

On May 19, 2003, we filed a Current Report on Form 8-Kregarding our first quarter of fiscal 2004 financial results and second quarterand full year fiscal 2004 financial projections.

 

On June 13, 2003, we filed a Current Report on Form8-K regarding our May sales results.

 

On July 11, 2003, we filed a Current Report on Form8-K regarding our June sales results.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   |               |   | LONGS DRUG STORES  CORPORATION |
|--------|--------------------|--------|--------------------------------|
|   |               |   | *(Registrant)*                 |
|   |               |   |                           |
|   |               |   |                           |
| Date:  | September 12, 2003 |   |                           | /s/ S. F. McCann |
|   |               |   |                           | (S. F. McCann)*Senior Vice President, Chief Financial  Officer and Treasurer* |
|   |               |   |                           |
|   |               |   |                           |
| Date:  | September 12, 2003 |   |                           | /s/ R. L.  Chelemedos |
|   |               |   |                           | (R. L. Chelemedos)*Vice President – Controller and Assistant  Secretary**(Principal Accounting Officer)* |

 

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