10-Q

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended May 2, 2002

or

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

Commission file number 1-8978

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

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

Registrant's telephone number, including area code:    (925) 937-1170

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        There were 38,301,357 shares of common stock outstanding as of May 30, 2002.

Table of Contents

PART I—FINANCIAL INFORMATION
	Item 1	Condensed Consolidated Financial Statements	1
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3	Quantitative and Qualitative Disclosures of Market Risk	15
PART II—OTHER INFORMATION
	Item 6	Exhibits and Reports on Form 8-K	16
	Signature Page		17

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (unaudited)

		For the 13 weeks ended
		May 2, 2002			April 26, 2001
		(Thousands Except Per Share Amounts)
Sales		$	1,089,829		$	1,032,063
Cost of merchandise sold			808,064			769,385
	Gross profit		281,765			262,678
Operating and administrative expenses			242,349			222,033
Depreciation and amortization			18,866			18,601
Provision (benefit) for store closures and asset impairment, net			—			(982	)
	Operating income		20,550			23,026
Interest expense			3,331			4,059
Interest income			(370	)		(333	)
	Income before income taxes and cumulative effect of accounting change		17,589			19,300
Income taxes			6,619			7,700
Income before cumulative effect of accounting change			10,970			11,600
Cumulative effect of accounting change (net of tax benefit of $16,410)			(24,625	)		—
Net (loss) income		$	(13,655	)	$	11,600
Basic earnings (loss) per common share:
	Income before cumulative effect of accounting change	$	0.29		$	0.31
	Cumulative effect of accounting change (net of tax benefit of $0.43)		(0.65	)		—
	Net (loss) income	$	(0.36	)	$	0.31
Diluted earnings (loss) per common share:
	Income before cumulative effect of accounting change	$	0.29		$	0.31
	Cumulative effect of accounting change (net of tax benefit of $0.43)		(0.65	)		—
	Net (loss) income	$	(0.36	)	$	0.31
Dividends per common share		$	0.14		$	0.14
Weighted average number of shares outstanding:
	Basic		37,770			37,249
	Diluted		38,085			37,578

See notes to condensed consolidated financial statements.

1

Condensed Consolidated Balance Sheets

				May 2, 2002			April 26, 2001			January 31, 2002
				(Thousands Except Share Information)
ASSETS
Current Assets:					-------(Unaudited)-------
Cash and equivalents				$	60,392		$	59,014		$	123,187
Pharmacy and other receivables, net					128,691			105,697			122,494
Merchandise inventories					416,272			415,502			406,383
Deferred income taxes					24,231			26,192			27,297
Other					5,252			5,821			5,053
	Total current assets				634,838			612,226			684,414
Property:
Land					107,563			108,355			104,928
Buildings and leasehold improvements					494,027			473,357			488,492
Equipment and fixtures					478,298			432,219			475,048
	Total property at cost				1,079,888			1,013,931			1,068,468
Less accumulated depreciation					490,559			429,085			476,185
		Property, net			589,329			584,846			592,283
Goodwill					82,276			127,415			123,306
Intangible assets, net					5,632			5,930			5,574
Other assets					6,396			23,551			6,014
		Total		$	1,318,471		$	1,353,968		$	1,411,591
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable				$	246,188		$	262,938		$	270,473
Short-term borrowings					—			10,000			—
Employee compensation and benefits					80,426			77,545			83,089
Taxes payable					26,012			43,724			61,394
Current portion of long-term debt					2,536			3,141			2,629
Other					40,260			30,098			30,169
	Total current liabilities				395,422			427,446			447,754
Long-term debt					191,584			210,626			198,774
Deferred income taxes and other long-term liabilities					26,659			23,041			43,490
Commitments and Contingencies
Stockholders' Equity:
Common stock (38,250,000, 37,783,000 and 37,977,000 shares outstanding)					19,125			18,892			18,988
Additional capital					163,848			152,614			156,977
Common stock contribution to Profit Sharing Plan					—			—			2,939
Unearned compensation					(5,853	)		(5,659	)		(4,007	)
Retained earnings					527,686			527,008			546,676
	Total stockholders' equity				704,806			692,855			721,573
			Total	$	1,318,471		$	1,353,968		$	1,411,591

See notes to condensed consolidated financial statements.

2

Condensed Consolidated Statements of Cash Flows (unaudited)

				For the 13 weeks ended
				May 2, 2002			April 26, 2001
				(Thousands)
Operating Activities:
	Net (loss) income			$	(13,655	)	$	11,600
	Adjustments to reconcile net (loss) income to net cash provided by operating activities:
		Cumulative effect of accounting change			24,625			—
		Depreciation and amortization			18,866			18,601
		Deferred income taxes and other			3,587			622
		Stock awards, net			378			509
		Common stock contribution to benefit plans			1,777			2,085
		Tax benefits related to stock awards			68			141
		Changes in assets and liabilities:
			Pharmacy and other receivables		(5,712	)		(1,391	)
			Merchandise inventories		(9,889	)		8,837
			Other assets		(26	)		2,092
			Current liabilities		(52,239	)		(5,717	)
		Net cash (used in) provided by operating activities			(32,220	)		37,379
Investing Activities:
	Payments for property additions, store acquisitions and other assets				(18,078	)		(23,774	)
	Receipts from property dispositions and sale-leasebacks				121			3,386
		Net cash used in investing activities			(17,957	)		(20,388	)
Financing Activities:
	Proceeds from long-term borrowings				—			15,000
	Repayments of long-term borrowings				(7,283	)		(2,394	)
	Repayments of short-term borrowings				—			(10,000	)
	Dividend payments				(5,335	)		(5,275	)
		Net cash used in financing activities			(12,618	)		(2,669	)
Increase (decrease) in cash and equivalents					(62,795	)		14,322
Cash and equivalents at beginning of period					123,187			44,692
Cash and equivalents at end of period				$	60,392		$	59,014
Supplemental disclosure of cash flow information:
	Cash paid for interest				3,370			2,766
	Cash paid for income taxes				17,110			15,494

See notes to condensed consolidated financial statements.

3

Condensed Consolidated Statements of Stockholders' Equity
For the 53 weeks ended January 31, 2002 and the 13 weeks ended May 2, 2002

							Common Stock Contributions to Profit Sharing Plan
		Common Stock
					Additional Capital					Unearned Compensation			Retained Earnings			Total Stockholders' Equity
		Shares	Amount
		(Thousands)
Balance at January 25, 2001		37,367	$	18,683	$	141,200	$	7,695		$	(4,466	)	$	520,683		$	683,795
Net income														47,168			47,168
Dividends ($.56 per share)														(21,175	)		(21,175	)
Employee Savings and Profit Sharing Plan:
	Issuance of stock for FY01 profit sharing contribution	287		144		7,551		(7,695	)								—
	Stock portion of FY02 profit sharing contribution							2,939									2,939
	Issuance of stock for 401(k) matching contributions	285		143		6,776											6,919
Stock awards, net of forfeitures		38		18		1,309					(1,426	)					(99	)
Amortization of restricted stock awards											1,885						1,885
Tax benefits related to stock awards						141											141
Balance at January 31, 2002		37,977		18,988		156,977		2,939			(4,007	)		546,676			721,573
Unaudited:
Net loss														(13,655	)		(13,655	)
Dividends ($.14 per share)														(5,335	)		(5,335	)
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	66		33		1,744											1,777
Stock awards, net of forfeitures		87		44		2,180					(2,379	)					(155	)
Amortization of restricted stock awards											533						533
Tax benefits related to stock awards						68											68
Balance at May 2, 2002		38,250	$	19,125	$	163,848	$	—		$	(5,853	)	$	527,686		$	704,806

See notes to condensed consolidated financial statements.

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.

The accompanying condensed consolidated financial statements include Longs Drug Stores Corporation ("Longs" or the "Company") and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The condensed consolidated financial statements have been prepared on a basis consistent with the accounting policies described in the Annual Report of the Company on Form 10-K for the fiscal year ended January 31, 2002, and reflect all adjustments which are, in management's opinion, necessary for a fair statement of the results for the periods presented. The condensed consolidated financial statements as of and for the periods ended May 2, 2002 and April 26, 2001 are unaudited. The condensed consolidated balance sheet as of January 31, 2002, and condensed consolidated statement of stockholders' equity for the year then ended, presented herein, have been derived from the audited consolidated financial statements of the Company included in the Form 10-K for the fiscal year ended January 31, 2002. Certain reclassifications have been made to prior year financial statements to conform to the current presentation.

2.

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

		13 weeks ended
		May 2, 2002		April 26, 2001
		Thousands Except Per Share Amounts
Reported income before cumulative effect of accounting change		$	10,970	$	11,600
Amortization of goodwill, net of tax			—		963
Amortization of other intangibles with indefinite lives, net of tax			—		66
Adjusted income before cumulative effect of accounting change		$	10,970	$	12,629
Basic earnings per share:
	Reported income before cumulative effect of accounting change	$	0.29	$	0.31
	Amortization of goodwill, net of tax		—		0.03
	Amortization of other intangibles with indefinite lives, net of tax		—		—
	Adjusted income before cumulative effect of accounting change	$	0.29	$	0.34
Diluted earnings per share:
	Reported income before cumulative effect of accounting change	$	0.29	$	0.31
	Amortization of goodwill, net of tax		—		0.03
	Amortization of other intangibles with indefinite lives, net of tax		—		—
	Adjusted income before cumulative effect of accounting change	$	0.29	$	0.34

5

As required by SFAS No. 142, the Company performed a transitional goodwill impairment test as of February 1, 2002, the date of adoption of the standard. Based on an independent valuation, the Company identified certain regional reporting units in its retail drug store segment that have experienced declines in their fair values below their net carrying values. Accordingly, the Company recognized a goodwill impairment charge of $41.0 million ($24.6 million after tax or $0.65 per diluted share) for these reporting units in the first quarter of fiscal 2003 as the cumulative effect of a change in accounting principle.

In June 2001, the FASB also issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for the Company beginning in fiscal 2004. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of. The Company adopted SFAS No. 144 in the first quarter of fiscal 2003. The adoption of SFAS No. 144 did not have a material impact on the Company's financial position or results of operations.

3.

Merchandise inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out (LIFO) method. The excess of specific cost over LIFO values was $167.0 million at May 2, 2002, $157.6 million at April 26, 2001 and $165.3 million at January 31, 2002. LIFO costs for interim financial statements are estimated based on projected annual inflation rates. Actual LIFO costs are calculated during the fourth quarter of the fiscal year when final inflation rates and inventory levels are determined.

4.

All of the Company's goodwill and other intangible assets are included in the retail drug store segment. As discussed in note 2, goodwill and other intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment testing. Intangible assets with finite useful lives are amortized over those useful lives. The Company's intangible assets include the following:

				May 2, 2002					January 31, 2002
			Useful Lives	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
						Thousands
Goodwill			N/A	$	82,276				$	123,306
Amortized intangible assets:
	Pharmacy customer lists		1-5 years	$	1,860	$	(1,086	)	$	3,658	$	(2,864	)
	Non-compete agreements		2-5 years		774		(703	)		1,042		(964	)
	Other		10 years		12		(5	)		12		(5	)
		Total		$	2,646	$	(1,794	)	$	4,712	$	(3,833	)
Unamortized intangible assets:
	Beverage licenses		N/A	$	4,780				$	4,695

The decrease of $41.0 million in the carrying value of goodwill during the thirteen weeks ended May 2, 2002 was due to the impairment charge discussed in note 2. The decreases in pharmacy customer lists and non-compete agreements were due to the removal of fully amortized assets.

6

Amortization expense for intangible assets with finite useful lives was $75,000 for the thirteen weeks ended May 2, 2002. Estimated annual amortization expense on these intangibles for fiscal 2003 and each of the succeeding five fiscal years is as follows (in thousands):

Fiscal Year 2003	$	281
Fiscal Year 2004	$	248
Fiscal Year 2005	$	220
Fiscal Year 2006	$	151
Fiscal Year 2007	$	26
Fiscal Year 2008	$	1

5.

Long-term debt at May 2, 2002 and January 31, 2002 consisted of the following:

	May 2, 2002		January 31, 2002
	Thousands
Unsecured revolving line of credit, interest based on LIBOR (weighted average rate of 3.11% at May 2, 2002), expires October 2004	$	35,000	$	40,000
Private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014		158,571		160,714
Equipment notes and other		549		689
Total long-term debt		194,120		201,403
Less current portion		2,536		2,629
Long-term portion	$	191,584	$	198,774

Borrowings on the Company's unsecured revolving line of credit are included in long-term debt in the accompanying condensed consolidated balance sheets, as such amounts do not require repayment until the agreement expires in October 2004.

The Company's debt agreements contain limits on borrowings, dividend payments and repurchases of Company stock, and various quarterly financial covenants that set maximum leverage ratios and minimum fixed charge coverage ratios. As of May 2, 2002, the Company was in compliance with the restrictions and limitations included in these provisions.

6.

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common shares and dilutive common equivalent shares (restricted stock awards and stock options) outstanding during the period. The following is a reconciliation of the number of shares used in the Company's basic and diluted net income per share computations:

		13 weeks ended
		May 2, 2002	April 26, 2001
		Thousands
Basic weighted average number of shares outstanding		37,770	37,249
Effect of dilution from:
	Restricted stock awards	167	162
	Stock options	148	167
Diluted weighted average number of shares outstanding		38,085	37,578

7

7.

The Company records the estimated costs associated with closing a store during the period in which the store is identified and approved by management under a plan of termination, which includes the method of disposition and the expected date of completion. These costs include direct costs to terminate a lease or sub-lease a property, net of expected sublease income, and the difference between the carrying values and estimated recoverable values of long-lived tangible and intangible assets. Severance and other employee-related costs are recorded in the period in which the closure and related severance packages are communicated to the affected employees. Losses on the liquidation of inventories are recorded in cost of merchandise sold when the inventories are sold or otherwise disposed of.

The Company closed one store in the first quarter of fiscal 2003 and 15 stores in the first quarter of fiscal 2002. Costs incurred for closed stores and adjustments to the related reserves are summarized as follows:

	13 weeks ended
	May 2, 2002			April 26, 2001
	Thousands
Store closure reserve balance, beginning of period	$	12,551		$	35,472
Costs incurred for closed stores, charged against reserve		(2,202	)		(8,688	)
Increase (decrease) to reserve		—			(982	)
Store closure reserve balance, end of period	$	10,349		$	25,802

8.

The Company operates in two business segments, retail drug stores and pharmacy benefit management ("PBM"). These segments were identified based on their separate and distinct products and services, technology, marketing strategies and management reporting. Management evaluates the segments' operating performance separately and allocates resources based on their respective financial condition, results of operations and cash flows, exclusive of inter-segment transactions and balances, which 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 seasonal merchandise. As of May 2, 2002, the retail drug store segment operated 439 stores in six western states under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy.

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

Prior to the Company's September 2001 acquisition of 100% ownership in the PBM, RxAmerica was a joint venture between the Company and Albertson's Inc., and the Company accounted for its interest in RxAmerica using the equity method of accounting. Therefore, in the 13 weeks ended April 26, 2001, the Company operated in one business segment, retail drug stores.

The following table summarizes significant financial information by segment as of and for the 13 weeks ended May 2, 2002:

	Retail Drug Stores		Pharmacy Benefit Management		Consolidated Totals
			Thousands
Sales	$	1,084,714	$	5,115	$	1,089,829
Income before income taxes and cumulative effect of accounting change		15,562		2,027		17,589
Total assets		1,279,876		38,595		1,318,471

8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Such statements relate to, among other things, pharmacy and front-end sales trends, prescription margins, margin improvement, cost reductions, distribution center performance, changes in supply chain practices, the number of store openings and the level of capital expenditures, and are indicated by words or phrases such as "continuing," "expects," "estimates," "believes" and other similar words or phrases. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual events and results to vary materially from those included in or contemplated by such statements. These risks and uncertainties include, but are not limited to, among other things, changes in economic conditions generally or in the markets we serve; consumer preferences and spending patterns; continuing softness in the economy; competition from other drugstore chains, supermarkets, on-line retailers, other retailers and mail order companies; changes in state or federal legislation or regulations; the efforts of third-party payers to reduce prescription drug costs; the success of planned advertising and merchandising strategies; the ability of our automated fill center to meet expectations in filling prescriptions; the availability and cost of real estate for, and construction of, new stores; accounting policies and practices; our ability to hire and retain pharmacists and other store and management personnel; our relationships with our suppliers; our ability to improve our purchasing of front-end products; our ability to successfully implement new computer systems and technology; the impact of rising energy costs on our operations; changes in internal business processes associated with supply chain and other initiatives; adverse determinations with respect to litigation or other claims; and other factors discussed in this quarterly report under "Risk Factors" and elsewhere or in any of our other SEC filings. We assume no obligation to update our forward-looking statements to reflect subsequent events or circumstances.

RESULTS OF OPERATIONS

Sales

	13 weeks ended
	May 2, 2002			April 26, 2001
Sales (Thousands)	$	1,089,829		$	1,032,063
Sales Growth		5.6	%		8.0	%
Same Store Sales Growth		4.3	%		6.6	%
Impact of New Stores / Closed Stores on Sales Growth		0.8	%		1.4	%
Impact of RxAmerica on Sales Growth		0.5	%		—
Pharmacy Sales Growth		9.2	%		15.6	%
Same Store Pharmacy Sales Growth		8.4	%		14.3	%
Pharmacy as a % of Total Drug Store Sales		45.9	%		44.6	%
% of Pharmacy Sales Reimbursed by Third Party Health Plans		90.6	%		89.1	%
Front-End Sales Growth		1.9	%		2.6	%
Same Store Front-End Sales Growth		1.0	%		1.1	%
Front-End as a % of Total Drug Store Sales		54.1	%		55.4	%

Sales increased 5.6% in the first quarter of fiscal 2003 over the same quarter of fiscal 2002. Same-store sales increased 4.3%, and new stores accounted for an increase of 0.8%. RxAmerica's net sales, which have been included in our consolidated total sales since our acquisition of full ownership of the PBM in September 2001, contributed the remaining 0.5% of total sales growth in the quarter. The increased usage of newer and more costly prescription drugs and the aging U.S. population have continued to fuel sales growth.

9

Pharmacy sales increased 9.2% over the same quarter last year, primarily due to an 8.6% increase in the average retail price per script. Same-store pharmacy sales increased 8.4%. Pharmacy sales were 45.9% of total drug store sales in the first quarter of fiscal 2003, compared to 44.6% in the first quarter of fiscal 2002. We expect these trends to continue due to the increased usage of newer and more costly prescription drugs and the aging U.S. population.

Pharmacy sales reimbursed by third-party health plans represented 90.6% of total pharmacy sales, compared to 89.1% in the same quarter last year. We expect this trend to continue due to the ongoing shift to managed care.

Front-end sales increased 1.9% over the same quarter last year. Same-store front-end sales increased 1.0%, primarily due to increased promotional sales resulting from a refocused and event-driven advertising and marketing campaign. This increase reversed a trend of three quarters of negative same-store front-end sales that resulted primarily from increased competition; an economic slowdown, exacerbated by the terrorist attacks of September 11, 2001; a weak holiday shopping season and a mild cold and flu season that resulted in lower over-the-counter drug sales.

Gross Profit

	13 weeks ended
	May 2, 2002			April 26, 2001
Gross Profit (Thousands)	$	281,765		$	262,678
LIFO Provision (Thousands)		1,700			2,000
Gross Margin %		25.9	%		25.5	%

Gross margin as a percent of sales was 25.9% in the first quarter of fiscal 2003, compared to 25.5% in the same quarter last year. The increase was primarily due to the inclusion of RxAmerica's gross profit in our consolidated total. We recognize RxAmerica's revenues from third-party health plans net of the related reimbursements due to participating pharmacies. We do not record any of RxAmerica's expenses in cost of merchandise sold. Therefore, all of RxAmerica's revenues ($5.1 million in the first quarter of fiscal 2003) are included in gross profit. In the first quarter of fiscal 2002, RxAmerica was a joint venture between Longs and Albertson's, and we recorded our share of the PBM's profits in operating and administrative expenses using the equity method of accounting.

Gross margins on pharmacy sales increased slightly over the first quarter of last year due to increased usage of generic drugs, which have higher margins than name-brand drugs. This helped offset a multiyear trend of declining pharmacy margin percentages experienced throughout the retail drug store industry caused by the increasing percentage of pharmacy sales reimbursed by third-party health plans, which have lower margins than non third-party sales. We anticipate that the percentage of pharmacy sales reimbursed by third-party health plans will continue to increase. Pharmacy sales also have lower margins than front-end sales, and as pharmacy sales grow as a percent of total sales, overall margins will be adversely impacted. However, despite decreases in pharmacy margins, pharmacy gross profit in dollars has continued to rise with the growth in sales.

Gross margin percentages on front-end sales were relatively constant with the first quarter of last year. In the quarter ended May 2, 2002, we commenced a series of initiatives, approved by our Board of Directors, to increase efficiency and enhance profitability. One of those initiatives is an upgrade of our supply chain practices. Improvements in our supply chain, including more efficient distribution center operations and more favorable merchandise buying terms, offset the negative impact of increased promotional sales, which generally have lower margins than other front-end sales.

Our gross profit included LIFO provisions of $1.7 million in the first quarter of fiscal 2003 and $2.0 million in the first quarter of fiscal 2002, included in cost of merchandise sold. The LIFO provision fluctuates with inflation rates and inventory levels and mix. We estimate LIFO costs for interim financial statements based on projected annual inflation rates. We calculate actual LIFO costs during the fourth quarter of the fiscal year when we determine final inflation rates and inventory levels.

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Operating and Administrative Expenses

Operating and administrative expenses were 22.2% of sales in the first quarter of fiscal 2003, compared to 21.5% in the same quarter last year. The increase reflected the inclusion of RxAmerica's operating and administrative expenses of approximately $3.3 million, or 0.3% of sales, in our consolidated total. In the first quarter of fiscal 2002, RxAmerica was a joint venture between Longs and Albertson's, and we recorded $0.7 million of income in operating and administrative expenses to reflect our share of the PBM's profits under the equity method of accounting. We also incurred operating and administrative expenses of $2.9 million, or 0.3% of sales, related to the supply chain initiative discussed above. The remainder of the increase is primarily due to higher employee health and worker compensation insurance costs.

Depreciation and Amortization

Depreciation and amortization were $18.9 million, or 1.7% of sales, in the first quarter of fiscal 2003, compared to $18.6 million, or 1.8% of sales, in the first quarter of fiscal 2002. Effective with the first quarter of fiscal 2003, we no longer record amortization expense for goodwill and certain other intangible assets with indefinite useful lives, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Amortization for such assets was $1.7 million in the first quarter of fiscal 2002. Excluding discontinued amortization, depreciation and amortization increased by $2.0 million, primarily due to increased depreciation expense resulting from capital expenditures for new store investments, improvements to existing stores, supply chain improvements and technology.

Provision for Store Closures and Asset Impairment

We record the estimated costs associated with closing a store during the period in which the store is identified and approved by management under a plan of termination, which includes the method of disposition and the expected date of completion. We regularly evaluate our store closure reserves and adjust them accordingly based on the estimated future costs to complete the store closures. In the first quarter of fiscal 2002 we recorded a benefit of $1.0 million from the reduction of our store closure reserve. We closed one store in the first quarter of fiscal 2003 and 15 stores in the first quarter of fiscal 2002.

Net Interest Expense

Net interest expense was $3.0 million in the first quarter of fiscal 2003, compared to $3.7 million in the same quarter last year. The decrease was due to lower borrowings and lower interest rates.

Income Taxes

Our effective income tax rate was 37.6% in the first quarter of fiscal 2003, compared to 39.9% in the same quarter last year. The decrease was primarily due to a federal tax law change that allows us to deduct dividends paid on 100% vested shares held in our employee stock ownership plan.

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 million after tax or $0.65 per diluted share) in the first quarter of fiscal 2003 as the cumulative effect of a change in accounting principle (see "New Accounting Pronouncements").

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LIQUIDITY AND CAPITAL RESOURCES

        Cash and equivalents were $60.4 million at May 2, 2002, compared to $59.0 million at April 26, 2001 and $123.2 million at January 31, 2002. The decrease of $62.8 million from the January 31, 2002 balance was due to the use of $32.2 million of cash in operations, primarily due to timing (as discussed below), $18.0 million in net capital expenditures and $12.6 million in financing activities.

Operating Cash Flows

        Net cash used in operating activities was $32.2 million in the first quarter of fiscal 2003. In the same quarter last year, net cash provided by operating activities was $37.4 million. The decrease was primarily due to the timing of the respective quarter-end dates. The first quarter of fiscal 2003 ended on May 2nd, while the first quarter last year ended on April 26th. As a result, certain calendar-based payments such as sales and income taxes, rent and some merchandise purchases were paid during the first quarter of fiscal 2003 versus the second quarter of fiscal 2002. Therefore, current liabilities decreased by $52.3 million from January 31, 2002. Operating cash flows were also negatively impacted by increases in receivables and inventories resulting from the increase in the number of stores. In the same quarter last year, inventories declined by $8.8 million due to the closure of 15 stores.

Investing Cash Flows

        Net cash used in investing activities was $18.0 million in the first quarter of fiscal 2003, compared to $20.4 million in the same quarter last year. Investing cash flows included capital expenditures for new stores and store improvements, technology and supply chain improvements.

        We opened four new stores and closed one store in the first quarter of fiscal 2003. In the first quarter of fiscal 2002, we opened four new stores and closed fifteen stores. We plan to open between 21 and 26 additional new stores in the remainder of fiscal 2003, bringing the total number of new stores to between 25 and 30 for the fiscal year. We expect net capital expenditures for the full year to be approximately $120 million, including amounts for new stores and store improvements, technology and supply chain improvements.

Financing Cash Flows

        Net cash used in financing activities was $12.6 million in the first quarter of fiscal 2003, compared to $2.7 million in the first quarter of fiscal 2002. We repaid $7.3 million of long-term borrowings, including regularly scheduled principal payments and a reduction of borrowings on our revolving line of credit, and paid dividends of $5.3 million during the first quarter of fiscal 2003. In the same quarter last year, we repaid $12.4 million of debt, including short-term borrowings and regularly scheduled principal payments, and paid dividends of $5.3 million, offset by additional borrowings of $15.0 million on our revolving line of credit.

        We have a $150 million unsecured revolving line of credit, which expires in October 2004 and accrues interest at LIBOR-based rates. Borrowings on the line of credit do not require repayment until the expiration date. As of May 2, 2002, $35.0 million was outstanding under this line of credit with a weighted average interest rate of 3.11%.

        Additionally, as of May 2, 2002, we had $158.6 million in privately placed promissory notes, which mature at various dates through 2014 and bear interest at fixed rates ranging from 5.85% to 7.85%.

        Our debt agreements contain limits on borrowings, dividend payments and repurchases of company stock, and various quarterly financial covenants that set maximum leverage ratios and minimum fixed charge coverage ratios. As of May 2, 2002, we were in compliance with the restrictions and limitations included in these provisions.

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        In November 1999, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock through November 2004, for a maximum total expenditure of $80 million. To date, we have purchased 1,146,868 shares under this authorization at a total cost of $22.5 million. We did not repurchase any of our common stock during the first quarter of fiscal 2003.

        We believe that cash on hand, together with cash provided by operating activities and borrowings on our line of credit, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

NEW ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will no longer be amortized, but must be tested for impairment annually, or more frequently if events and circumstances indicate there may be an impairment. We adopted SFAS No. 141 and SFAS No. 142 in the first quarter of fiscal 2003. The adoption of SFAS No. 141 did not have a material impact on our financial position or results of operations. Upon adoption of SFAS No. 142, we discontinued the amortization of goodwill with a carrying value of $123.3 million as of January 31, 2002 and annual amortization of approximately $6.3 million.

        As required by SFAS No. 142, we have performed a transitional goodwill impairment test as of February 1, 2002, the date of adoption of the standard. Based on an independent valuation, we have identified certain regional reporting units that have experienced declines in their fair values below their net carrying values. Accordingly, we recognized a goodwill impairment charge of $41.0 million ($24.6 million after tax or $0.65 per diluted share) for these reporting units in the first quarter of fiscal 2003 as the cumulative effect of a change in accounting principle.

        In June 2001, the FASB also issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for us beginning in fiscal 2004. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of. We adopted SFAS No. 144 in the first quarter of fiscal 2003. The adoption of SFAS No. 144 did not have a material impact on our financial position or results of operations.

RISK FACTORS

        You should carefully read the following risk factors.

The markets in which we operate are highly competitive, and further increases in competition could adversely affect us.

        We face intense competition with local, regional, and national companies, including other drug store chains, independent drug stores, on-line retailers, supermarket chains and mass merchandisers. Many of our competitors have substantially greater resources, including name recognition and capital resources, than we do. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, which would require us to increase our sales volume and to sell higher-margin products and services at reduced prices to remain competitive. We cannot

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assure you that we will be able to continue to compete effectively in our markets or increase our sales volume or margins in response to further increased competition.

Our ability to successfully implement supply chain improvements and other strategic initiatives is critical to the ongoing success of our business.

        In February 2002, our board of directors approved a program to upgrade our supply chain practices in an effort to increase efficiency and enhance profitability, along with initiatives to increase front-end sales and pharmacy margins, enhance customer service and improve operational efficiencies. We expect to spend approximately $60 million in capital expenditures for supply chain improvements under this program over the next four fiscal years. The success of these initiatives is important to our future profitability. We cannot assure you that we will be able to execute these initiatives successfully.

Changes in third-party reimbursement levels for prescription drugs continue to reduce our margins on pharmacy sales and could have a material adverse effect on our overall performance.

        We are reimbursed by third-party health plans for approximately 90% of all the prescription drugs that we sell, and this percentage has continued to increase. Pharmacy sales to third parties have lower gross margins than non third-party pharmacy sales. Third-party health plans continue to reduce the levels at which they reimburse us for the prescription drugs that we provide to their members. Furthermore, if Medicare is reformed to include prescription benefits, Medicare may cover some of the prescription drugs that we now sell at retail prices, and we may be reimbursed at prices lower than our current retail prices. If third-party health plans continue to reduce their reimbursement levels, or if Medicare covers prescription drugs at reimbursement levels lower than our current retail prices, our margins on these sales will continue to be reduced, and our profitability will be adversely affected.

A continued economic slowdown could adversely affect consumer-buying practices and reduce our sales of front-end products, which are our higher margin products.

        The economy began showing signs of slowing in fiscal 2002. The terrorist attacks on September 11, 2001 adversely affected sales for that week and have had a continuing negative impact on tourism. We operate 32 stores in the state of Hawaii, which have been adversely impacted by the decline in tourism. If the economy continues to slow and unemployment increases or inflationary conditions worry consumers, they may decrease their purchases, particularly of products other than pharmaceutical products that they need for health reasons. We make a higher profit on our sales of front-end products than we do on sales of pharmaceutical products. Therefore, any decrease in our sales of front-end products will decrease our profitability.

Our ability to attract and retain pharmacy personnel or develop alternate fill sources is important to the continued success of our business.

        Our industry is experiencing a shortage of licensed pharmacists in the markets in which we operate. Our inability to attract and retain pharmacists and other key personnel could adversely affect us. In response to the pharmacist shortage we recently entered into a joint venture agreement with AmerisourceBergen to operate a central prescription fill center. The success of this fill center is important to our ability to address the shortage of pharmacists.

We are substantially dependent on a single supplier of pharmaceutical products to sell products to us on satisfactory terms; a disruption in our relationship with this supplier could have a material adverse effect on our business.

        We obtain approximately 54% of our total merchandise, including 95% of our pharmaceutical supplies, from a single supplier, AmerisourceBergen, pursuant to a long-term supply contract. Any significant disruptions in our relationships with AmerisourceBergen could have a material adverse effect on us.

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We are subject to governmental regulations, procedures and requirements; our noncompliance or their significant change could have a material adverse effect on us.

        Our pharmacy business is subject to numerous federal, state and local regulations. These include local registrations of pharmacies in the states where our pharmacies are located, applicable Medicare and Medicaid regulations, prohibitions against paid referrals of patients and protection of confidential patient medical records and information. Failure to properly adhere to these and other applicable regulations could result in the imposition of civil and criminal penalties. Furthermore, federal and state reform programs, such as healthcare reform initiatives, could adversely affect our pharmacies, and any new federal or state programs could also adversely affect us.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

        Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products. Although we maintain professional liability and errors and omissions liability insurance, we cannot assure you that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will maintain this insurance on acceptable terms in the future.

The markets for various types of insurance have been increasingly volatile; reductions or modifications in the insurance coverage we are able to obtain, or increased insurance related expenses, could have a material adverse affect on us.

        The costs of employee health, worker compensation, property and casualty, general liability and other types of insurance have continued to rise, while the amount and availability of coverage have decreased. These conditions have been exacerbated by rising health care costs, legislative changes, economic conditions and the terrorist attacks of September 11, 2001. If we are unable to obtain adequate levels of insurance, or if our insurance costs significantly increase, our financial position and results of operations could be adversely affected.

The energy crisis in the state of California may result in increased operating and administrative expenses in fiscal 2003.

        As of May 2, 2002, we operated 364 stores in the state of California, which has experienced energy shortages causing some power outages. California utility companies announced significant increases in energy rates, which were reflected in utility bills received beginning in the third quarter of fiscal 2002. These shortages may expand to other markets in which we operate. We have taken such steps as reducing store lighting, raising store temperatures and disconnecting unused electrical equipment to conserve energy, but the volatility of energy rates has resulted in increased operating and administrative expenses, and our energy-related expenses may continue to increase in fiscal 2003.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

        Our major market risk exposure is changing interest rates. We use debt financing in combination with operating cash flows to support capital expenditures, acquisitions, working capital needs and general corporate purposes. A portion of our debt bears interest at LIBOR-based rates, and therefore an increase in interest rates could increase our interest expense. We do not undertake any specific actions to cover our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We have not purchased and do not hold any derivative financial instruments.

        A 10% change in interest rates (31 basis points on our floating-rate debt as of May 2, 2002) would have an immaterial effect on our earnings and cash flows and on the fair value of our fixed rate debt.

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PART II—OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

(a)

Exhibits

Exhibit 3.1: Amended By-Laws of Longs Drug Stores Corporation, dated February 26, 2002.

Exhibit 10.1: Separation agreement between the Company and Stephen D. Roath, President and Chief Executive Officer, dated February 26, 2002.

(b)

Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended May 2, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		LONGS DRUG STORES CORPORATION(Registrant)
Date:	June 14, 2002	/s/  STEVEN F. MCCANN    Steven F. McCann     Senior Vice President, Chief Financial Officer     and Treasurer
Date:	June 14, 2002	/s/  GROVER L. WHITE    Grover L. White     Vice President—Controller and Assistant Secretary

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF OPERATIONS
SIGNATURES

EX-3.1

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EXHIBIT 3.1

AMENDED BY-LAWS
AS APPROVED BY
BOARD OF DIRECTORS
LONGS DRUG STORES CORPORATION
AND
MARYLAND COUNSEL
February 26, 2002

LONGS DRUG STORES CORPORATION
(a Maryland Corporation)

BY-LAWS

ARTICLE I

STOCKHOLDERS

        Section 1.01.    Annual Meeting.    The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, either at 10:30 a.m. on the third Tuesday of May in each year if not a legal holiday, or at such other time on such other day falling in the month of May as shall be set by the Board of Directors. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts.

        Section 1.02.    Special Meeting.    At any time in the interval between annual meetings, a special meeting of the stockholders may be called by (a) the President, (b) by a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting or (c) by the Lead Director or, if there is no Lead Director, by the Chairman of the Board. Special meetings of the stockholders shall be called by the Secretary at the request of the stockholders only on the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting and then only as may be required by law.

        Section 1.03.    Place of Meetings.    Meetings of stockholders shall be held at such place in the United States as is set from time to time by the Board of Directors.

        Section 1.04.    Notice of Meeting; Waiver of Notice.    Not less than ten nor more than 90 days before each stockholders' meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him, left at his residence or usual place of business, or mailed to him at his address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he before or after the meeting signs a waiver of the notice which is filed with the records of stockholders' meetings, or is present at the meeting in person or by proxy.

        Section 1.05.    Quorum; Voting.    Unless statute or the Charter provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes, entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting.

        Section 1.06.    Adjournments.    Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time by the stockholders present in person or by proxy by a majority vote. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. No further notice of an adjourned meeting other than by announcement shall be necessary if held on a date not more than 120 days after the original record date.

        Section 1.07.    General Right to Vote; Proxies.    Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock

he owns of record either in person or by written proxy signed by the stockholder or by his duly authorized attorney in fact. Unless a proxy provides otherwise, it is not valid more than 11 months after its date.

        Section 1.08.    List of Stockholders.    At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Secretary, shall be furnished by the Secretary.

        Section 1.09.    Nominations of Directors.    In addition to any other requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election to the Board of Directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation shall be made at a meeting of stockholders at which directors are to be elected exclusively in accordance with this Section. Nominations of persons for such elections shall be deemed properly made if (i) set forth in proxy materials prepared for such a meeting by or at the direction of the Board of Directors, (ii) made by a stockholder at such a meeting at the direction of the Board of Directors, or (iii) made by a stockholder at such a meetings (other than at the direction of the Board of Directors) if timely notice has been given to the Secretary of the Corporation at the principal executive offices of the Corporation of such intent to make a nomination. To be timely, such stockholder's notice must be received by the Corporation not less than 90 days prior to the stockholder meeting.

        Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person, if any, and (iv) any other information relating to such person which is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, or any successor act or Regulation; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may be reasonably required by the Corporation to determine the qualifications of such proposed nominee to serve as a director of the Corporation.

        No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 1.09. These procedures shall not apply to the nomination of any persons entitled to be separately elected by holders of Preferred Stock. The chairman of a stockholder meeting may, if the facts warrant, determine and declare to the meeting that a nomination has not been made in accordance with the foregoing procedure and that such defective nomination shall be disregarded.

        Section 1.10.    Stockholder Proposals.    In addition to any other requirements, any motions, resolutions, or proposals by stockholders (hereinafter "proposals") made at a meeting of stockholders shall be exclusively in accordance with this Section. Proposals shall be deemed properly made if (i) set forth in proxy materials prepared for such a meeting by or at the direction of the Board of Directors, (ii) made by a stockholder at such a meeting at the direction of the Board of Directors, or (iii) made by a stockholder at such a meeting (other than at the direction of the Board of Directors) if timely notice has been given to the Secretary of the Corporation at the principal executive offices of the Corporation of such intent to make the proposal. To be timely, such stockholder's notice must be received by the Corporation not less than 90 days prior to the stockholder meeting.

        Such stockholder's notice shall set forth a brief description of any proposal the stockholder intends to make, the reasons for bringing such proposal before the meeting, the name and address of the stockholder, and the class and number of shares of the Corporation which are beneficially owned by the stockholder, and any material interest of the stockholder in the subject of the proposal.

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        No stockholder shall make a proposal at a stockholder meeting except in accordance with the procedures set forth in this Section 1.10. The chairman of a stockholder meeting may determine and declare to the meeting that a proposal has not been made in accordance with the foregoing procedure and that such defective proposal shall be disregarded.

        Section 1.11.    Conduct of Voting.    At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman of the meeting, the vote upon any election or question shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors, in which event the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by such inspectors. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. The stockholders at any meeting may choose an inspector or inspectors to act at such meeting, and in default of such election the chairman of the meeting may appoint an inspector or inspectors. No candidate for election as a director at a meeting shall serve as an inspector thereat.

        Section 1.12.    Informal Action By Stockholders.    Any act required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders meetings a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it.

        Section 1.13.    Voting By Certain Holders of Stock.    Voting shall be subject to the following provisions:

        (a)  A fiduciary may vote, either in person, or by proxy, stock registered in his name as fiduciary. A fiduciary may vote, either in person or by proxy, stock registered in the name of another person on proof of the fact that legal title to the stock has devolved on him in a fiduciary capacity and that he is qualified to act in that capacity.

        (b)  A stockholder of record who pledges his shares may vote them, but as between the pledgor and the pledgee, this subsection does not affect the validity of any agreement between them as to the giving of proxies or the exercise of voting rights.

        (c)  If stock is registered in the names of two or more persons, whether as fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two or more persons have the same fiduciary relationship with respect to the same stock, unless the Secretary of the Corporation is given written notice to the contrary and is furnished with a copy of the instrument or order which so provides, their acts with respect to voting have the following effects:

        (1)  If only one votes, his vote binds all, and if more than one vote, the vote of the majority binds all.

        (2)  If more than one vote and the vote is evenly split on any particular matter, then (i) each faction may vote the stock in question proportionately unless otherwise provided by court order; or (ii) any person voting the stock or any beneficiary may apply to a court of competent jurisdiction to appoint an additional person to act with the persons voting the stock and the stock shall then be voted as determined by a majority of those persons and the person appointed by the court.

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        (d)  Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the By-Laws of such other corporation may prescribe or, in the absence of such provision, by such officer, agent or proxyholder as the Board of Directors of such other corporation may determine; or, in the absence of such determination, by the Chairman of the Board, President or any Vice-President of such other corporation, or by any other person or proxyholder authorized to do so by the Board, President or any Vice-President of such other corporation. Whenever the authority of a person voting shares standing in the name of another corporation is based upon a By-law determination of the Board of Directors, or authorization of the Board of Directors, President or Vice- President of the other corporation, the person seeking to vote said shares may first be required to file with the chairman of the meeting, or with the inspectors if the voting be conducted by inspectors a copy of the By-laws, Board of Directors' determination or authorization of the Board of Directors, President or Vice-President of the other corporation, certified to be true, complete, and effective by the Secretary or an Assistant Secretary of the other corporation, and sealed with the corporate seal of that corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of another corporation (whether or not any title of the person so voting or executing the proxy is indicated) may be presumed to be voted or the proxy executed in accordance with the provisions of this subdivision, in the discretion of the chairman of the meeting, or of the inspectors if the voting be conducted by inspectors.

        (e)  Shares of a corporation's own stock owned directly or indirectly by it may not be voted at any meeting and may not be counted in determining the total number of outstanding shares entitled to be voted at any given time unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.

ARTICLE II

BOARD OF DIRECTORS

        Section 2.01.    Function of Directors.    The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or By-Laws.

        Section 2.02.    Number of Directors.    The Corporation shall have at least three directors; provided that, if there is not stock outstanding, the number of Directors may be less than three but not less than one, and, if there is stock outstanding and so long as there are less than three stockholders, the number of Directors may be less than three but not less than the number of stockholders. The Corporation shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 15 nor less than the minimum number then permitted herein, but the action may not affect the tenure of office of any director.

        Beginning with the election of directors in 1985, the Board of Directors shall be divided into three classes, Class I, Class II and Class III. Each such class shall consist, as nearly as possible, of one-third of the total number of directors, and any remaining directors shall be included within such class or classes as the Board of Directors shall designate. At the annual meeting of stockholders in 1985, Class I directors shall be elected for a one-year term, Class II directors for a two-year term, and Class III directors for a three-year term. At each succeeding annual meeting of stockholders beginning in 1986, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. A

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director shall hold office, subject to removal, death, resignation, retirement or disqualification, until the annual meeting for the year in which his term expires and until his successor shall be elected and qualify. The provisions of this Section 2.02 shall not apply to directors governed by Section 2.12 of this Article II.

        Section 2.03.    Vacancy on Board.    The stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term of the removed director. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his successor is elected and qualifies. The provisions of this Section shall not apply to directors governed by Section 2.12 of this Article II.

        Section 2.04.    Chairman of the Board.    The Chairman of the Board of Directors shall be chosen from among the directors. The Chairman of the Board shall be the chairman of all meetings of the stockholders at which he shall be present and, if there is no Lead Director, at all meetings of the Board of Directors at which he shall be present, except as may be required under applicable law or by resolution of the Board of Directors. The Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws or the Board of Directors.

        Section 2.05.    Lead Director.    If at any time the Chairman of the Board shall be an executive officer or former executive officer of the Corporation or for any reason shall not be an independent director, a Lead Director shall be selected by the independent directors from among the directors who are not executive officers or former executive officers of the Corporation and are otherwise independent. The Lead Director shall be chairman of all meetings of the Board of Directors and the Executive Committee at which the Lead Director is present. The Lead Director shall also perform such other duties as may be assigned to the Lead Director by these By-Laws or the Board of Directors.

        Section 2.06.    Regular Meetings.    After each annual meeting of stockholders, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. In addition, the Board of Directors shall meet on the fourth Tuesday of February and on the third Tuesday of August and November of each year at 1:30 p.m. of each of said days at the principal offices of the Corporation, unless the Board of Directors sets such regular meeting at a different place, date, or time, in which case notice shall be given to each director pursuant to Section 2.08.

        Regular meetings shall be held at any place within or without the State which has been designated by these By-Laws or from time to time by resolution of the Board. The first regular meeting shall be held after each annual meeting of stockholders. No notice of such first meeting, or of any regular meeting, shall be necessary if held as provided herein.

        Section 2.07.    Special Meetings.    Special meetings of the Board of Directors may be called at any time by the President, by a majority of the then-acting directors or by the Lead Director, or, if there is no Lead Director, by the Chairman of the Board. A special meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of designation such meeting shall be held at such place as may be designated in the call.

        Section 2.08.    Notice of Meeting.    Except as provided in Section 2.06, the Secretary shall give notice to each director of each meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him, left at his residence or usual place of business, or sent by facsimile or telephone, at least 24 hours before the time of the meeting or, in the alternative by mail to his address as it shall appear on the records of the

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Corporation, at least 72 hours before the time of the meeting. Unless the By-Laws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement.

        Section 2.09.    Action By Directors.    Unless statute or the Charter or By-Laws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if a unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board.

        Section 2.10.    Meeting By Conference Telephone.    Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting.

        Section 2.11.    Compensation.    By resolution of the Board of Directors, a fixed sum and expenses, if any, for attendance at each regular or special meeting of the Board of Directors or of committees thereof, and other compensation for their services as such or on committees of the Board of Directors, may be paid to directors.

        Section 2.12.    Directors Elected By Special Class or Series.    To the extent that any holders of any class or series of stock other than Common Stock issued by the Corporation shall have the separate right, voting as a class or series, to elect directors, the directors elected by such class or series shall be deemed to constitute an additional class of directors and shall have a term of office for one year or such other period as may be designated by the provisions of such class or series providing such separate voting right to the holders of such class or series of stock, and any such class of directors shall be in addition to the classes referred to in Section 2.02 of this Article II. Any directors so elected shall be subject to removal in such manner as may be provided by law or by the Charter of this Corporation. The provisions of Sections 2.02 and 2.03 of this Article II do not apply to directors governed by this Section 2.12.

ARTICLE III

COMMITTEES

        Section 3.01.    Committees.    The Board of Directors shall have the following standing committees: an Audit and Compliance Committee, a Compensation Committee, a Nominating Committee, and a Finance and Strategic Planning Committee, together with such other committees as the Board of Directors shall determine. Each such committee shall be composed of one or more directors and shall exercise such powers of the Board of Directors as may be provided in the charter and/or resolution established for such committee, except for the power to declare dividends on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend the By-Laws, or approve any merger or share exchange

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which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors.

        Section 3.02.    Executive Committee.    The Board of Directors may by resolution establish an Executive Committee of the Board, which, unless otherwise determined by the Board, shall be comprised of the Chairpersons of each of the standing committees and the Lead Director. The Executive Committee may, but shall not be required to, exercise all of the powers of the Board of Directors, except for the power to declare dividends on stock, elect directors, issue stock (other than as provided in Section 3.01), recommend to the stockholders any action which requires stockholder approval, amend the By-Laws, or approve any merger or share exchange which does not require stockholder approval, in such circumstances where it is impracticable to convene a meeting of the full Board of Directors. Unless otherwise determined by the Board, the Lead Director shall be the Chairperson of the Executive Committee.

        Section 3.03.    Committee Procedure.    The Board of Directors shall have the power to prescribe the manner in which proceedings of each committee shall be held. Unless the Board of Directors shall otherwise provide, the actions of each committee shall be governed by the following rules of procedure: A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. Each committee may provide for the holding of regular meetings. Special meetings may be called at any time by the Chairperson of a committee or by a majority of its members. Any action required or permitted to be taken at a meeting of a committee may be taken without meeting, if a unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 2.10. In the absence of any prescription by the Board of Directors or any applicable provision of the By-Laws, each committee may prescribe the manner in which its proceedings shall be conducted.

        Section 3.04.    Emergency Provisions.    The provisions of this Section shall be operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic, or other attack on the United States or a disaster making it impossible or impracticable for the Corporation to conduct its business without recourse to the provisions of this Section. Said provisions in such event shall override all other By-Laws of the Corporation in conflict with any provisions of this Section, and shall remain operative so long as it remains impossible or impracticable to continue the business of the Corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the By-Laws other than those contained in this Section.

        (a)    Unavailable Directors.    All Directors of the Corporation who are not available to perform their duties as Directors by reason of physical or mental incapacity, or for any other reason, or who are unwilling to perform their duties, or whose whereabouts are unknown shall automatically cease to be Directors, with like effect as if such persons had resigned as Directors, so long as such unavailability continues.

        (b)    Authorized Number of Directors.    The authorized number of Directors shall be the number of Directors remaining after eliminating those who have ceased to be Directors pursuant to Subsection (a) or the minimum number required by law, whichever number is greater.

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        (c)    Quorum.    The number of Directors necessary to constitute a quorum shall be one-third, (¹/3) of the authorized number of Directors as specified in the foregoing Subsection, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the By-Laws of a corporation to specify.

        (d)    Creation of Emergency Committee.    In the event the number of Directors remaining after eliminating those who have ceased to be Directors pursuant to Subsection (a) is less than the minimum number of authorized Directors required by law, then until the appointment of additional Directors to make up such required minimum, all the powers and authorities which the Board could by law delegate, including all powers and authorities which the Board could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the Corporation, pursuant to such powers and authorities, and shall have all such other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency.

        (e)    Constitution of Emergency Committee.    The emergency committee shall consist of all the Directors remaining after eliminating those who have ceased to be Directors pursuant to Subsection (a), provided that such remaining Directors are not less than three (3) in number. In the event such remaining Directors are less than three (3) in number, the emergency committee shall consist of three (3) persons, who shall be the remaining Director or Directors and either one (1) or two (2) officers or employees of the Corporation, as the remaining Director or Directors may in writing designate. If there is no remaining Director, the emergency committee shall consist of the three (3) most senior officers of the Corporation who are available to serve, and if to the extent that officers are not available, the most senior employees of the Corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration. In the event that there are no remaining Directors and no officers or employees of the Corporation available, the emergency committee shall consist of three (3) persons designated in writing by stockholders owning twenty percent (20%) or more of the shares of record as of the date of the last record date.

        (f)    Powers of Emergency Committee.    The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment, all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Section.

        (g)    Directors Becoming Available.    Any person who has ceased to be a Director pursuant to the provisions of Subsection (a) and who thereafter becomes available to serve as a Director shall automatically become a member of the emergency committee.

        (h)    Election of Board of Directors.    The emergency committee shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a Board of Directors, and upon such election all the powers and authorities of the emergency committee shall cease.

        (i)    Termination of Emergency Committee.    In the event, after the appointment of an emergency committee, a sufficient number of persons who ceased to be Directors pursuant to Section 2 become available to serve as Directors, so that if they had not ceased to be Directors as aforesaid, there would be enough Directors to constitute the minimum number of Directors

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required by law, then all persons shall automatically be deemed to be reappointed as Directors and the powers and authorities of the emergency committee shall be at an end.

ARTICLE IV

OFFICERS

        Section 4.01.    Executive and Other Officers.    The Corporation shall have a President, a Secretary, and a Treasurer who shall be the executive officers of the Corporation. The Board of Directors may designate who shall serve as Chief Executive Officer, having general supervision of the business and affairs of the Corporation, or as Chief Operating Officer, having supervision of the operations of the Corporation; in the absence of designation the President shall serve as Chief Executive Officer. It may also have one or more Vice-Presidents, assistant officers, and subordinate officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation but may not serve concurrently as both President and Vice-President of the Corporation. The officers may be directors.

        Section 4.02.    Chief Executive Officer.    The Chief Executive Officer, if one be designated, shall have the general and active management and supervision of the business of the Corporation. The Chief Executive Officer, if a member of the Board of Directors, shall (i) in the absence of the Chairman of the Board, preside at meetings of the stockholders at which he shall be present and (ii) in the absence of the Lead Director or, if there is no Lead Director, in the absence of the Chairman of the Board, preside at meetings of the Board of Directors at which he shall be present; he may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been delegated to some other officer or agent of the Corporation; if a member of the Board of Directors, he shall be a member, ex-officio, of all committees of the Board of Directors, except the Audit and Compliance Committee, unless the Board provides to the contrary when appointing any committee; and, in general, he shall perform all duties usually performed by a Chief Executive Officer of a corporation and such other duties as are from time to time assigned to him by the Board of Directors.

        Section 4.03.    President.    The President, if a member of the Board of Directors, shall (i) in the absence of the Chairman of the Board and the Chief Executive Officer, preside at meetings of stockholders at which he shall be present and (ii) in the absence of the Lead Director or, if there is no Lead Director, in the absence of the Chairman of the Board and the Chief Executive Officer, preside at meetings of the Board of Directors at which he shall be present. Except in cases in which the signing and execution of certain documents and instruments have been delegated to some other officer or agent of the Corporation, the President may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts and other instruments. The President shall perform all duties usually performed by a President of a corporation and such other duties as are from time to time assigned to him by the Board of Directors and the Chief Executive Officer. The President, at the request of the Chief Executive Officer, or in the Chief Executive Officer's absence or during his inability to act, shall perform the duties and exercise the functions of the Chief Executive Officer, and when so acting, shall have the powers of the Chief Executive Officer.

        Section 4.04.    Vice-Presidents.    The Vice-President or Vice- Presidents, at the request of the President, or in the President's absence or during his inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice-President, the Board of Directors may determine which one or more of the Vice-Presidents shall perform any of such duties or exercise any of said functions, or if such determination is not made by the Board of Directors, the Chief Executive Officer may make such determination; otherwise any of the Vice-Presidents may perform. any of such duties or exercise any of such functions. The Vice-President or Vice-Presidents shall have such other powers and perform such

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other duties, and have such additional descriptive designations in their titles (if any), as are from time to time assigned to them by the Board of Directors or the Chief Executive Officer.

        Section 4.05.    Secretary.    The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees, in books provided for the purpose; he shall see that all notices are duly given in accordance with provisions of the By-Laws or as required by law; he shall be custodian of the records of the Corporation; except where delegated to some other officer or agent of the Corporation, he may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same; and, in general, he shall perform all duties incident to the office of a secretary of a corporation, and such other duties as are from time to time assigned to him by the Board of Directors or the Chief Executive Officer.

        Section 4.06.    Treasurer.    The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he shall render to the Chief Executive Officer and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; and, in general, he shall perform all the duties incident to the office of a treasurer of a corporation, and such other duties as are from time to time assigned to him by, the Board of Directors or the Chief Executive Officer.

        Section 4.07.    Assistant and Subordinate Officers.    The assistant and subordinate officers of the Corporation are all officers below the office of Vice-President, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the Board of Directors or the Chief Executive Officer.

        Section 4.08.    Election, Tenure and Removal of Officers.    The Board of Directors shall elect the officers. The Board of Directors may from time to time authorize any committee or officer to appoint assistant and subordinate officers. All officers shall be appointed to hold their offices, respectively, during the pleasure of the Board. The Board of Directors (or any committee or officer authorized by the Board) may remove an officer at any time. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may fill a vacancy which occurs in any office for the unexpired portion of the term.

        Section 4.09.    Compensation.    The Board of Directors shall have power to fix the salaries and other compensation and remuneration, of whatever kind, of all officers of the Corporation. It may authorize any committee or officer, to fix the salaries, compensation and remuneration of any subordinate officer.

ARTICLE V

STOCK

        Section 5.01.    Certificates for Stock.    Each stockholder is entitled to certificates which represent and certify the shares of stock he holds in the Corporation. Each stock certificate shall include on its face the name of the corporation that issues it, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chief Executive Officer, the President or a Vice-President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be

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either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued.

        Section 5.02.    Transfers.    The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the, issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined.

        Section 5.03.    Record Date and Close of Transfer Books.    The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting.

        Section 5.04.    Stock Ledger.    The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation.

        Section 5.05.    Lost Stock Certificates.    The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises.

ARTICLE VI

SUNDRY PROVISIONS

        Section 6.01.    Fiscal Year.    The fiscal year of the Corporation shall be the twelve calendar months period commencing on the last Friday in the month of January in each year, and ending on the last Thursday in the month of January in the immediately succeeding year, unless otherwise provided by the Board of Directors.

        Section 6.02.    Dividends.    If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter.

        Section 6.03.    Books and Records.    The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of a Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of the By-Laws shall be kept at the principal office of the Corporation.

        Section 6.04.    Corporate Seal.    The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is

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required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "Seal" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation.

        Section 6.05.    Bonds.    The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors.

        Section 6.06.    Voting Upon Shares in Other Corporations.    Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President; provided, however, that if the Board of Directors has designated a Chief Executive Officer who is not the President, that officer and not the President, may vote such stock. A proxy appointed by the officer having the authority to vote such stock may also vote such stock, or a proxy appointed by any of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case each person shall be entitled to vote such shares upon the production of a certified copy of such resolution.

        Section 6.07.    Mail.    Any notice or other document which is required by these By-Laws to be mailed shall be deposited in the United States mails, postage prepaid.

        Section 6.08.    Execution of Documents.    A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer.

        Section 6.09.    Amendment.    These By-Laws may be altered, amended, or repealed and new by-laws may be adopted to the extent and as provided in the Charter of the Corporation.

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TABLE OF CONTENTS

		Page
ARTICLE I STOCKHOLDERS		1
Section 1.01.	Annual Meeting	1
Section 1.02.	Special Meeting	1
Section 1.03.	Place of Meetings	1
Section 1.04.	Notice of Meeting; Waiver of Notice	1
Section 1.05.	Quorum; Voting	1
Section 1.06.	Adjournments	2
Section 1.07.	General Right to Vote; Proxies	2
Section 1.08.	List of Stockholders	2
Section 1.09.	Nominations of Directors	2
Section 1.10.	Stockholder Proposals	3
Section 1.11.	Conduct of Voting	3
Section 1.12.	Informal Action By Stockholders	3
Section 1.13.	Voting By Certain Holders of Stock	4
ARTICLE II BOARD OF DIRECTORS		5
Section 2.01.	Function of Directors	5
Section 2.02.	Number of Directors	5
Section 2.03.	Vacancy on Board	6
Section 2.04.	Chairman of the Board	6
Section 2.05.	Lead Director	6
Section 2.06.	Regular Meetings	6
Section 2.07.	Special Meetings	6
Section 2.08.	Notice of Meeting	7
Section 2.09.	Action By Directors	7
Section 2.10.	Meeting By Conference Telephone	7
Section 2.11.	Compensation	7
Section 2.12.	Directors Elected By Special Class or Series	7
ARTICLE III COMMITTEES		8
Section 3.01.	Committees	8
Section 3.02.	Executive Committee	8
Section 3.03.	Committee Procedure	8
Section 3.04.	Emergency Provisions	9
ARTICLE IV OFFICERS		10
Section 4.01.	Executive and Other Officers	10
Section 4.02.	Chief Executive Officer	11
Section 4.03.	President	11
Section 4.04.	Vice-Presidents	11
Section 4.05.	Secretary	11
Section 4.06.	Treasurer	12
Section 4.07.	Assistant and Subordinate Officers	12
Section 4.08.	Election, Tenure and Removal of Officers	12
Section 4.09.	Compensation	12

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ARTICLE V STOCK		12
Section 5.01.	Certificates for Stock	12
Section 5.02.	Transfers	13
Section 5.03.	Record Date and Close of Transfer Books	13
Section 5.04.	Stock Ledger	13
Section 5.05.	Lost Stock Certificates	13
ARTICLE VI SUNDRY PROVISIONS		13
Section 6.01.	Fiscal Year	13
Section 6.02.	Dividends	13
Section 6.03.	Books and Records	14
Section 6.04.	Corporate Seal	14
Section 6.05.	Bonds	14
Section 6.06.	Voting Upon Shares in Other Corporations	14
Section 6.07.	Mail	14
Section 6.08.	Execution of Documents	14
Section 6.09.	Amendment	14

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QuickLinks

LONGS DRUG STORES CORPORATION (a Maryland Corporation) BY-LAWS
ARTICLE I STOCKHOLDERS
ARTICLE II BOARD OF DIRECTORS
ARTICLE III COMMITTEES
ARTICLE IV OFFICERS
ARTICLE V STOCK
ARTICLE VI SUNDRY PROVISIONS
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EX-10.1

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EXHIBIT 10.1

SEPARATION AGREEMENT

        THIS SEPARATION AGREEMENT (this "Agreement"), is made between Stephen D. Roath ("Roath") and Longs Drug Stores Corporation and Longs Drug Stores California, Inc. (collectively, "Longs" or the "Company") and shall become effective upon the Effective Date set forth in paragraph 18.

RECITALS

        WHEREAS, Roath is an employee and employed by Longs from his hiring date of June 14, 1964 to the present.

        WHEREAS, Longs recognizes Roath's many contributions to the corporation and desires to enter into this Agreement.

        NOW, THEREFORE, in consideration of the mutual promises, covenants and representations set forth below and other good and valuable consideration, the parties agree as follows:

        1.    Relinquishment of Positions.    Roath has resigned effective February 26, 2002 from his positions of President and Chief Executive Officer, and as a director of Longs Drug Stores Corporation. Roath has also resigned effective February 26, 2002 from his positions of President and Chief Executive Officer, and as a director of Longs Drug Stores California, Inc.

        2.    Earned Salary and Bonus.    Roath will be paid his earned salary and accrued vacation through February 26, 2002. Roath will be paid his fourth quarter fiscal year 2002 bonus on March 15, 2002.

        3.    Payment of Good and Valuable Consideration.    In consideration of Roath's acceptance of this Agreement and the release contained herein, Longs will provide the following:

        (a)  Roath shall be paid one million three hundred thirty-seven thousand dollars ($1,337,000) on the date that is three (3) days after the Effective Date.

        (b)  Roath shall be paid an amount per month equal to five hundred dollars ($500) during the period he is eligible for COBRA continuation coverage. If at the time Roath is no longer eligible to receive continuation coverage under COBRA, Roath does not have alternative coverage under a subsequent employer, the Company agrees to pay him an amount equal to seven hundred fifty dollars ($750) per month until the earlier of (i) the date he secures such coverage from a subsequent employer and (ii) March 4, 2006.

        (c)  Roath's option to purchase 30,000 shares of Longs Drug Stores Corporation which was granted to him on November 8, 2000 shall continue to vest until February 26, 2004 to the extent provided in such option.

        (d)  Any tax obligations of Roath and tax liability therefor, including any penalties and interest based upon such tax obligation, that arises from the benefits and payments made to him under this Agreement shall be Roath's responsibility and liability. Longs will report each payment provided for in this Section 3 on form W-2 for the tax year in which the payment was made.

        4.    No Other Benefits; No Admission of Liability.    Roath acknowledges that except as specifically set forth in Sections 2 and 3, Roath shall not be entitled to any other payments or benefits after February 26, 2002. Roath also acknowledges that the Agreement for Termination Benefits in the Event of a Change in Control entered into between Roath and Longs Drug Stores California, Inc. shall terminate as of February 26, 2002. Notwithstanding the foregoing, in the event there is a "Change in Control" of Longs as described in such agreement, the payments set forth in Section 3(a) and 3(b) of this Agreement that remain unpaid shall be payable within thirty (30) days following such Change in Control. It is understood and agreed that the furnishing of the consideration for this Agreement shall

not be deemed or construed at any time or for any purpose as an admission of liability by Longs or Roath.

        5.    Indemnification Against Claims.    To the fullest extent provided by law, Longs agrees to indemnify and hold Roath harmless from any liability, claim, demand, cost, expense and attorneys' fees incurred by him as a result of any actions or omissions by him in the course of his employment by the Company or as a director of the Company.

        6.    Confidentiality and Non-Disclosure.

        (a)  Unless required or otherwise permitted by law, Roath agrees to keep confidential and shall not disclose to others, including present or former Longs employees, any information described below:

(i)

Longs' "Confidential Information". As used in this Agreement, "Confidential Information" includes, but is not limited to the following: (a) weekly sales and wage data, (b) profitability data, (c) financial planning and forecasting data, (d) sales reports, including pharmacy prescription and sales volume, (e) individual store and collective gross profit information, (f) expense data, (g) return-on-investment data, (h) return-on-asset data, (i) bonus plans and reports, (j) warehouse distribution costs, (k) information regarding Longs' NonStop Solutions project and related data, (l) cost-benefit analysis regarding pharmacy distribution, (m) Longs' PRO program, (n) store and pharmacy inventory data, (o) pharmacy purchase data, (p) information regarding pharmacy automated dispensing system(s) and robotic technology, (q) corporate strategic planning information, (r) pharmacy prescription processing system, (s) computer programs and know how, (t) business and marketing plans and strategies, and (u) unpublished financial statements, budgets, projections, prices, costs and customer lists whether developed before or after the Effective Date;



(ii)

Longs' "Trade secrets", as defined under the Uniform Trade Secrets Act, California Civil Code section 3426.1;



(iii)

Any information that affords Longs a competitive advantage in the retail industry;



(iv)

Longs' proprietary information including but not limited to, supplier lists, product marketing or any other information obtained during his employment with Longs; and



(v)

Information with respect to acquisitions and mergers or sales or other dispositions of businesses or material assets by, of or with Longs.

        (b)  The provisions of this Section 6 shall not apply to (i) information which is generally known within the industry or in the public domain prior to the Effective Date, (ii) information which, not as a result of the disclosure by Roath, becomes part of the public domain, (iii) information which is available as a matter of public record and (d) information which is hereafter lawfully disclosed to Roath by a third party (other than any employees or agents of Longs).

        (c)  The non-disclosure obligations of this Section 6 shall not apply to disclosures made by Roath in response to any deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar legal process ("legally compelled disclosure") provided that Roath complies with the conditions of this Section 6(c). In the event that Roath is requested or becomes subject to make a legally compelled disclosure of any of the Confidential Information, Roath shall first provide Longs with prompt prior written notice of such requirement so that Longs may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Section 6.

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        (d)  Roath agrees that on or before the Effective Date, he shall turn over to Longs all Company confidential files, records, and other documents. In addition, Roath shall return all property in his possession owned by Longs.

        7.    Non-Disparagement.    Both Roath and Longs, through its directors and officers, agree not to make any unfavorable or disparaging remarks about the other to third parties. However, Roath acknowledges and agrees that the Company's non-disparagement obligation pursuant to this Agreement shall extend solely to the actions of Longs' directors and officers. For this purpose, "Officers" is defined as those persons identified by the Board of Directors as subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended.

        8.    Cooperation.    Roath agrees to cooperate with Longs, its attorneys or experts retained by Longs or its attorneys in connection with any litigation matters involving Longs that are pending on the Effective Date or that may arise thereafter regarding events prior to the Effective Date. The Company shall reimburse Roath for all reasonable expenses incurred in connection with such cooperation and, if such cooperation is required after the date that is two (2) years after the Effective Date, the Company shall also compensate Roath for time reasonably spent in connection with such cooperation at an hourly rate equivalent to his salary in effect at the time of his resignation.

        9.    No Other Claims.    Roath represents and warrants that he has not filed against Longs or any of its representatives, any claim, complaint, charge or suit with any federal, state or other agency, court, board, office or other forum or entity, including without limitation, any application for workers' compensation benefits. Roath agrees that he will not, at any time hereafter, file any such claim, complaint, charge or suit based upon circumstances arising before the Effective Date, other than a claim arising from a breach by the Company of this Agreement (which shall be subject to Section 11), and if any agency, court, board, office, forum or other entity assumes jurisdiction of any such claim, complaint, charge or suit, he will request such entity to withdraw from the matter. A breach of this Section 9 shall entitle Longs to damages as provided by law and shall relieve Longs of all obligations to Roath as provided in this Agreement.

        10.    General Release.

        (a)  Roath, on behalf of himself and his heirs, executors, administrators, successors and assigns, does hereby irrevocably and unconditionally release, acquit and forever discharge Longs and its affiliates and all of its and their stockholders, directors, officers, employees, representatives, successors, assigns, agents and attorneys from any and all charges, complaints, grievances, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of whatever kind or nature, known or unknown, suspected or unsuspected, joint or several ("Claims"), which Roath has had or may hereafter claim to have had, against Longs by reason of any matter, act, omission, cause or event whatever that has occurred up to and including the Effective Date other than those obligations set forth in this Agreement. This release and waiver of Claims specifically includes, without limitation: (i) all Claims arising from or relating in any way to any act or failure to act by any employee, officer or director of Longs, (ii) all Claims arising from or relating in any way to the employment relationship of Roath with Longs and/or the termination thereof, including any Claims which have been asserted or could have been asserted against Longs, and (iii) any and all Claims which might have been asserted by Roath in any suit, claim, or charge, for or on account of any matter or things whatsoever that has occurred up to and including the Effective Date, under any and all laws, constitutions, statutes, orders, regulations, or any other claim of right(s), including without limitation, any claim under Age Discrimination in Employment Act of 1967, as amended, Title VII of the Civil Rights Act of 1964, as amended (including the amendments of the Civil Rights Act of 1991), the Employee Retirement Income

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Security Act of 1976, as amended, and the Americans with Disabilities Act, State antidiscrimination statutes and any Claim in contract or tort.

        (b)  Each of Longs Drug Store Corporation and Longs Drug Stores California, on behalf of itself and its, successors and assigns, does hereby irrevocably and unconditionally release, acquit and forever discharge Roath and his heirs, executors, administrators, successors and assigns from any and all Claims which Longs has had or may hereafter claim to have had, against Roath by reason of any matter, act, omission, cause or event whatever that has occurred up to and including the Effective Date other than the obligations set forth in this Agreement.

        (c)  For the purpose of implementing a full and complete release and discharge, each of the parties expressly acknowledges that this Agreement with the general releases set forth in this Section 10 are intended to include in their effect, without limitation, all Claims which the parties do not know or suspect to exist in their favor at the time of execution of this Agreement, and that this Agreement and such general releases contemplate the extinguishment of all such Claims. Each of the parties expressly waives and relinquishes all rights and benefits he or it may have under Section 1542 of the California Civil Code which provides:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

        11.    Arbitration and Equitable Relief.

        (a)  Longs and Roath agree that any dispute, controversy or claim between the parties arising out of or relating to this Agreement, or any breach or asserted breach thereof, shall be determined and settled exclusively by arbitration in Walnut Creek, California in accordance with the rules for dispute resolution of JAMS/ENDISPUTE. Judgment on the award may be entered in any court of competent jurisdiction, and the parties specifically reserve all rights to appeal such judgment as if it were rendered in a court-of-law.

        (b)  Provided that the complaining party has given to the other party no less than one (1) week's prior written notice of the alleged breach, the parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction or other interim or conservatory relief as may be necessary, without breach of this Agreement and without abridgment of the powers of the arbitrator. The parties hereby submit themselves to the courts of California in and for the County of Contra Costa for the purpose of enforcing this Agreement.

        12.    Binding Agreement.    This Agreement shall be binding upon and inure to the benefit of Roath and Longs and their respective heirs, administrators, representatives, executors, successors and assigns. Roath hereby designates Jane Roath as his beneficiary under this Agreement.

        13.    Attorneys' Fees.    Each party shall bear its own costs and attorneys' fees incurred in the achieving the settlement and release of the matters set forth in this Agreement. If one party commences an action against the other to enforce or interpret the terms of this Agreement, or to obtain a declaration of rights under this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and expenses incurred in such action or any appeal or enforcement of such action, in addition to any other relief to which that party may be entitled under this Agreement.

        14.    Voluntary Participation.    Each of the parties acknowledges that he or it has read the Agreement, and that he or it enters into this Agreement freely, voluntarily, without coercion and based on the party's own judgment and not in reliance upon any representations or promises made by the others, except those contained in this Agreement.

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        15.    Method of Execution.    This Agreement may be executed in counterparts and each counterpart shall be deemed a duplicate original.

        16.    Governing Law.    This Agreement is deemed to have been made and entered into in the State of California and shall in all respects be interpreted, enforced and governed under the laws of the State of California. The language of all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning and not strictly for or against any party.

        17.    Severability.    The provisions of this Agreement are severable and should any provision of this Agreement be declared or be determined by any arbitrator or court to be illegal or invalid, any such provision shall be stricken, and the validity of the remaining parts, terms or provisions shall not be affected.

        18.    Older Workers Benefit Protection Act.    Pursuant to the requirements of the Older Workers Benefit Protection Act, Roath has up to 21 days from February 26, 2002 to consider and sign this Agreement, although Roath may accept it at any time within those 21 days. Roath hereby acknowledges that he has consulted an attorney or been advised to consult an attorney about this Agreement. Once Roath accepts the terms of this Agreement and signs this Agreement, he has seven days to revoke his acceptance. To revoke this Agreement, Roath must send to the Secretary of Longs Drug Stores Corporation a written statement of revocation by registered mail, return receipt requested. If he does not revoke this Agreement, this Agreement shall become effective on the eighth day after he signs it (the "Effective Date").

        19.    Entire Agreement.    This Agreement sets forth the entire agreement between the parties as to the subject matter hereof and supersedes any and all prior agreements or understandings between the parties written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by the party against whom enforcement of the change or modification is sought. Failure or delay on the part of either party to enforce any right, power, or privilege under this Agreement shall not be deemed to constitute a waiver thereof.

Date: February 26, 2002		/s/  STEVE ROATH Stephen D. Roath
Date: February 26, 2002		Longs Drug Stores Corporation
	By:	/s/  H. R. SOMERSET
		Authorized Signatory
Date: February 26, 2002		Longs Drug Stores California, Inc.
	By:	/s/  O. D. JONES
		Authorized Signatory

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