-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F4CzLiRUXEN89UCcr8f8B4J+QLqpoubllzv/P7JDMWIMACPxWWrwvlBaeotJuTcg NjLKQezZMqCqKCyeXjyt/g== 0000912057-97-013386.txt : 19970418 0000912057-97-013386.hdr.sgml : 19970418 ACCESSION NUMBER: 0000912057-97-013386 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970130 FILED AS OF DATE: 19970417 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONGS DRUG STORES CORP CENTRAL INDEX KEY: 0000764762 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 680048627 STATE OF INCORPORATION: MD FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08978 FILM NUMBER: 97582748 BUSINESS ADDRESS: STREET 1: 141 N CIVIC DR CITY: WALNUT CREEK STATE: CA ZIP: 94596 BUSINESS PHONE: 4159371170 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended January 30, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from . . . . . . . . to . . . . . . . . Commission file number 1-8978 LONGS DRUG STORES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Maryland 68-0048627 _________________________________________ __________________ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 141 North Civic Drive Walnut Creek, California 94596 _________________________________________ _________________ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (510) 937-1170 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The Exhibit Index is located on page 4 of this form. (Cover page 1 of 2 pages) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as computed by the price of the registrant's shares on the New York Stock Exchange at the close of business on April 8, 1997, was approximately $937,514,380. There were 39,267,618 shares of common stock outstanding as of April 8, 1997. DOCUMENTS INCORPORATED BY REFERENCE The Longs Drug Stores Corporation Annual Report to Shareholders for the year ended January 30, 1997, (hereinafter referred to as the Annual Report), has been incorporated by reference into: Part I - Items 1 and 3 Part II - Items 5, 6, 7, and 8 Part IV - Item 14(a)(1) The definitive proxy statement dated April 18, 1997, as filed with the Commission on April 17, 1997, involving the election of directors, has been incorporated by reference into Part III, Items 10, 11, 12, and 13. (Cover page 2 of 2 pages) PART I ITEM 1. BUSINESS Longs Drug Stores was founded by two brothers, Joe and Tom Long, in May of 1938 in Oakland, California. Pharmacy is the cornerstone of Longs' business, accounting for about 33% of sales, with script volume per day per store among the leaders in the industry. Complementing the pharmacy business are the core categories of over-the-counter health care products, photo and photo processing, cosmetics, and greeting cards. The Company's decentralized philosophy allows store managers to enhance the product mix of their store based on customer preference in the communities they serve. Longs sells nationally advertised name-brand merchandise. Customers are provided extra value with items sold under Longs' private label. Longs competes in the retail drug industry with local and national chains as well as with independent merchants. The Company's stores are located in California, Colorado, Hawaii, and Nevada. Merchandise of the kind sold by the Company can be found in variety stores, discount stores, supermarkets, and other retail facilities. Price, quality of goods and services, product mix, and convenience to the customer are a few principal elements of competition. The business is seasonal, peaking in the fourth quarter due to the Thanksgiving and Christmas holidays and cold and flu season. Seasonality is consistent with our competitors in the retail drug industry. The remainder of the information required by this item is contained in the Annual Report under the headings "Management's Discussion and Analysis" (pages 12-13), "Significant Accounting Policies" and "Employee Compensation and Benefits" (pages 18-19). ITEM 2. PROPERTIES As of January 30, 1997, Longs operates 337 stores; 291 in California, 32 in Hawaii, 8 in Nevada, and 6 in Colorado. Our stores vary in size, with the majority ranging from 15,000 to 25,000 square feet, approximately 68% of which is devoted to selling space. The average size of the stores opened this past fiscal year is 18,000 square feet. The 2 corporate offices, 2 warehouses and 121 of our stores are Company-owned buildings on Company-owned land; 43 stores are Company-owned buildings on leased land; and 173 are totally leased. The Company's properties are consistently maintained and updated and are in good condition and suitable to meet its needs. ITEM 3. LEGAL PROCEEDINGS The Registrant is not a party to any material pending legal proceedings other than described in the Annual Report under the heading "Settlement of Lawsuit" (page 20). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS There were no matters submitted to a vote of stockholders during the fourth quarter period covered by this report. 1 EXECUTIVE OFFICERS OF THE REGISTRANT The following persons are now executive officers of the Company and the Board of Directors intends to reelect them to their current offices.
POSITION HELD NAME AGE PRIMARY EXECUTIVE POSITION WITH REGISTRANT SINCE(1)(2) - -------------- --------- ------------------------------------------------ ------------- R. M. Long 58 Chairman of the Board and 1991 Chief Executive Officer(3) 1977 S. D. Roath 56 President(3) 1991 B. M. Brandon 58 Senior Vice President 1988 G. A. Duey 64 Senior Vice President 1988 D. J. Fong 48 Senior Vice President, Pharmacy 1995 O. D. Jones 58 Senior Vice President, Properties, 1987 and Secretary 1976 R. A. Plomgren 63 Senior Vice President, Development 1976 and Chief Financial Officer(3) 1995 G. H. Saito 52 Senior Vice President, District Manager(3) 1995 D. R. Wilson 55 Senior Vice President, Marketing 1988 G. L. White 56 Vice President, Controller, 1988 and Secretary C. E. Selland 40 Treasurer, Assistant Secretary 1994
(1) Each officer is elected for a one-year term. (2) All of the executive officers of the Company have been employed by the Company for at least the past five years in executive capacities or in related areas of responsibility. (3) Also serves as a Director of the Company. 2 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market on which the Company's common stock is traded is the New York Stock Exchange under the symbol "LDG." The number of shareholders as of April 8, 1997 was 15,075. The additional information required by this item is contained in the Annual Report under the headings "Statements of Consolidated Stockholders' Equity" (page 17), "Stockholders' Equity" (pages 19-20), and "Quarterly Financial Data (Unaudited)" (page 20). Such information is hereby incorporated by reference and filed herewith. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is contained in the Annual Report under the heading "Management's Discussion and Analysis" (pages 12-13) and "Five Year Selected Financial Data" (page 20). Such information is hereby incorporated by reference and filed herewith. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is contained in the Annual Report under the heading "Management's Discussion and Analysis" (pages 12-13). Such information is hereby incorporated by reference and filed herewith. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is contained in the Annual Report (pages 14-20). Such information is hereby incorporated by reference and filed herewith. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item with respect to directors is contained in a definitive proxy statement dated April 18, 1997, as filed with the Securities and Exchange Commission on April 17, 1997. Such information is hereby incorporated by reference. Certain information relating to executive officers of the Company is reported in Part I, Item 4 (page 2) of this report, entitled "Executive Officers of the Registrant." Information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is set forth in the definitive proxy statement dated April 18, 1997, as filed with the Commission on April 17, 1997, and is hereby incorporated by reference. Items 11, 12, and 13 are omitted since the Company filed on April 17, 1997, with the Securities and Exchange Commission a definitive proxy statement dated April 18, 1997, involving the election of directors, for the Annual Meeting on May 20, 1997. Such information is hereby incorporated by reference. 3 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS ------------------------------------------------------------------------- The following financial statements and independent auditors' report appearing in the Annual Report on pages 14 through 20 are incorporated herein by reference: Independent Auditors' Report. Statements of Consolidated Income for the fiscal years ended January 30, 1997, January 25, 1996, and January 26, 1995. Consolidated Balance Sheets as of January 30, 1997, and January 25, 1996. Statements of Consolidated Cash Flows for the fiscal years ended January 30, 1997, January 25, 1996, and January 26, 1995. Statements of Consolidated Stockholders' Equity for the fiscal years ended January 30, 1997, January 25, 1996, and January 26, 1995. Notes to Consolidated Financial Statements. (a)(2) Not applicable. (a)(3) EXHIBITS ------------------------------------------------------------------------- Exhibit No. 3. Articles of Incorporation and By-Laws a. A copy of the Articles of Incorporation and By-Laws of Longs Drug Stores Corporation is incorporated herein by reference as previously filed with the Commission on March 18, 1985, as Exhibit 3 to Form S-14, Registration No. 2-96486. b. By-Laws of Longs Drug Stores Corporation. 10. Material Contracts a. Agreement for terminal benefits in the event of uninvited change in corporate control of Longs Drug Stores California, Inc., is incorporated herein by reference as previously filed with the Commission on April 28, 1986, as Exhibit 10f to Form 10-K. b. A copy of the Rights Agreement of Longs Drug Stores Corporation dated August 19, 1986, is incorporated herein by reference as previously filed with the Commission on August 21, 1986, as Exhibits 1 and 2 to Form 8-A. 4
Exhibit Page No.: Number c. A copy of the Long Term Incentive Plan of 1987 of Longs Drug Stores Corporation is incorporated herein by reference as previously filed with the Commission on March 13, 1987, on Form S-8, Registration No. 33-12653. d. A copy of the undertakings of Longs Drug Stores Corporation is incorporated herein by reference as previously filed with the Commission on April 10, 1987, into Form S-8, Registration No. 2- 97578. e. A copy of the First Amendment to Rights Agreement of Longs Drug Stores Corporation dated November 15, 1988, is incorporated herein by reference as previously filed with the Commission on December 1, 1988, as Exhibit 1 to Form 8-K. f. A copy of the Note Purchase Agreement of Longs Drug Stores California, Inc., dated April 28, 1989, is incorporated herein by reference as previously filed with the Commission on April 18, 1990, as Exhibit 10n to Form 10-K. g. A copy of the Proposal to acquire Bill's Drugs, Inc. is incorporated herein by reference as previously filed with the Commission on August 6, 1993, on Form S-4, Registration No. 033- 49935. h. A copy of the 1995 Long-Term Incentive Plan of Longs Drug Stores Corporation is incorporated herein by reference as previously filed with the Commission on August 5, 1994, on Form S-8, Registration No. 033-54959. i. A copy of the Longs Drug Stores Corporation Deferred Compensation Plan of 1995 is incorporated herein by reference as previously filed with the Commission on June 6, 1995, on Form S-8, Registration No. 033-60005. j. A copy of the Amended Articles of Incorporation, amended May 22, 1996, is incorporated herein by reference as previously filed with the Commission on May 22, 1996, as Exhibit 1 to Form 10-Q. k. Copies of the renewal of the Agreements for Termination Benefits dated August 22, 1996, are incorporated herein by reference as previously filed with the Commission on April 28, 1986, as Exhibits 1-3 to Form 10-Q. l. A copy of the Shareholder Rights Agreement of Longs Drug Stores Corporation dated August 20, 1996, is incorporated herein by reference as previously filed with the Commission on September 16, 1996, as Exhibit 1 to Form 8-K. 13. Annual Report. . . . . . . . . . . . . . . . . . . . . .(Enclosed) 21. Subsidiary of the Registrant - Longs Drug Stores California, Inc., a California Corporation. 23. Consent of Auditors a. Independent Auditors' Consent . . . . . . . . . . . .(Enclosed) 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K There have been no reports on Form 8-K filed during the quarter ended January 30, 1997. 5 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LONGS DRUG STORES CORPORATION ---------------------------------------- (REGISTRANT) Date April 17, 1997 /s/ G. L. White ------------------------ ---------------------------------------- (G. L. White) Vice President - Controller (PRINCIPAL ACCOUNTING OFFICER) Date April 17, 1997 /s/ R. A. Plomgren ------------------------ ---------------------------------------- (R. A. Plomgren) Senior Vice President - Development and Director (CHIEF FINANCIAL OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date Signature ---- --------- April 17, 1997 By /s/ R. M. Long -------------------------- -------------------------------------- (R. M. Long) Chairman of the Board Chief Executive Officer and Director April 17, 1997 By /s/ S. D. Roath -------------------------- -------------------------------------- (S. D. Roath) President and Director 6 Date Signature ---- --------- April 17, 1997 By -------------------------- -------------------------------------- (R. M. Brooks) Director April 17, 1997 By /s/ W. G. Combs -------------------------- -------------------------------------- (W. G. Combs) Retired Vice President and Director April 17, 1997 By -------------------------- -------------------------------------- (D. G. DeSchane) Director April 17, 1997 By /s/ E. E. Johnston -------------------------- -------------------------------------- (E. E. Johnston) Director April 17, 1997 By /s/ M. S. Metz -------------------------- -------------------------------------- (M. S. Metz) Director April 17, 1997 By /s/ G. H. Saito -------------------------- -------------------------------------- (G. H. Saito) Director April 17, 1997 By -------------------------- -------------------------------------- (H. R. Somerset) Director April 17, 1997 By /s/ D. L. Sorby, Ph.D. -------------------------- -------------------------------------- (D. L. Sorby, Ph.D.) Director April 17, 1997 By /s/ T. R. Sweeney -------------------------- -------------------------------------- (T. R. Sweeney) Director April 17, 1997 By -------------------------- -------------------------------------- (F. E. Trotter) Director 7 EX-3.B 2 EXHIBIT 3-B LONGS DRUG STORES 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 the Chairman of the Board, by the President or 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. 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 - 1 - 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 - 2 - 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. - 3 - 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 30 days nor more than 60 days prior to the stockholder meeting; provided, however, that if less than 40 days' notice or prior public disclosure of the date of the stockholders' meeting is given or made to the stockholders - 4 - by the Corporation, then notice by the stockholder of intent to make a nomination must be received by the Corporation no later than the close of business on the 10th day following the day on which the Corporation mailed the notice of the date of the meeting or public or otherwise made disclosure of such meeting date. Such shareholder'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 - 5 - 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 30 days nor more than 60 days prior to the stockholder meeting; provided, however, that if less than 40 days' notice or prior public disclosure of the date is given or made to the stockholders by the Corporation, then notice by the stockholder of,intent to make the proposal must be received by the Corporation no later than the close of business on the 10th day following the - 6 - day on which the Corporation mailed the notice of the date of the meeting or public disclosure of such meeting date. Such shareholder'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. 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, - 7 - 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 - 8 - 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 - 9 - 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. (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 - 10 - 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. - 11 - 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 - 12 - 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 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 2.10 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 t he 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 - 13 - 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 shareholders and until his successor is elected and qualifies. The provisions of this Section shall not apply to directors governed by Section 2.10 of this Article II. Section 2.04. 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 2.06. 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 2.05. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the - 14 - Board or by the Chief Executive or by a majority of the then-acting directors. 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 2.06. NOTICE OF MEETING. Except as provided in Section 2.04, 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 telegraph 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 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 - 15 - no notice need be given of any such adjourned meeting other than by announcement. Section 2.07. 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 2.08. 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 2.09. COMPENSATION. By resolution of the Board of Directors a fixed sum and expenses, if any, for attendance at - 16 - 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 2.10. 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. - 17 - ARTICLE III. COMMITTEES Section 3.01. COMMITTEES. The Board of Directors may appoint from among its members one or more committees composed of one or more directors and delegate to these committees any of the powers of the Board of Directors, except 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 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. 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 - 18 - 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. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. 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 2.08. 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 3.03. 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 - 19 - 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. (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 - 20 - 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), - 21 - 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. - 22 - (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 - 23 - 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 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. - 24 - 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. It may also have a Chairman of the Board. 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 Chairman of the Board shall be a director; the other officers may be directors. Section 4.02 CHAIRMAN OF THE BOARD. The Chairman of the Board, if one be elected, shall perform all such duties as are from time to time assigned to him by the Board of Directors. Section 4.03 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if one be designated, shall preside at meetings - 25 - of the Board of Directors at which he shall be present; he shall preside at meetings of the stockholders 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; he shall be a member, ex-officio, of all committees of the Board of Directors, except the Audit 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 4.04. PRESIDENT. The President, in the absence of the Chief Executive Officer, shall preside at meetings of the Board of Directors and stockholders at which he shall be present. Except in cases in which the signing and execution of certain documents and instruments has 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 - 26 - 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 4.05. 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 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 4.06. 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 - 27 - 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 4.07. 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 4.06. ASSISTANT AND SUBORDINATE OFFICERS. The assistant and subordinate officers of the Corporation are all - 28 - 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 4.09. 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 4.10. 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. - 29 - 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 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 - 30 - 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. - 31 - 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. - 32 - 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 - 33 - 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 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 - 34 - 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. - 35 - EX-13 3 EXHIBIT 13 [LONGS DRUGS LOGO] "THE SUCCESSFUL INITIATIVES OF THE PAST TWO YEARS HAVE SET A STRONG FOUNDATION FOR CONTINUED GROWTH AT LONGS" A n n u a l R e p o r t 1 9 9 7 [MAP] NUMBER OF STORES AT FISCAL YEAR END - ------------------------------------ California 291 Hawaii 32 Nevada 8 Colorado 6 - ------------------------------------ Total 337 COMPANY-OWNED PROPERTIES AT FISCAL YEAR END - ------------------------------------ Store Building and Land 121 Store Building on Leased Land 43 Corporate Offices 2 Warehouses 2 C O R P O R A T E P R O F I L E Longs Drug Stores is one of the largest drug store chains in North America, operating 337 stores in California, Hawaii, Nevada and Colorado. The Company offers a uniquely broad assortment of merchandise--including pharmaceutical products, personal care items, photography supplies and greeting cards--along with excellent value and a high degree of customer service. Longs common stock is traded on the New York Stock Exchange under the symbol LDG. - --------------------------------------- TABLE OF CONTENTS - --------------------------------------- 1 Financial Highlights 3 Message to Stockholders 8 Internal Initiatives 11 External Expansion 12 Management's Discussion & Analysis 14 Financial Review 21 Board of Directors and Officers [Longs Drugs logo] F I N A N C I A L H I G H L I G H T S (MILLIONS EXCEPT SALES PER SQUARE FT., PER SHARE DATA AND NUMBER OF STORES) - ---------------------------------------------------------------------------- FY 1997 FY 1996 FY 1995 Sales $ 2,828 $ 2,644 $ 2,558 Net Income $ 59 $ 55(1) $ 49 PER SHARE DATA (2) Net Income $ 1.49 $ 1.35(1) $ 1.18 Dividends $ 0.56 $ 0.56 $ 0.56 BALANCE SHEET DATA Total Assets $ 880 $ 854 $ 828 Stockholders' Equity $ 554 $ 523 $ 524 KEY FINANCIAL RATIO Return on Average Stockholders' Equity 10.9% 10.4%(1) 9.5% STORE DATA Number of Stores at Year End 337 328 317 Selling Square Footage at Year End 5.4 5.2 5.1 Sales Per Selling Square Foot (52-week basis) $ 518 $ 505 $ 506 (1) Excluding $14 million lawsuit settlement in FY 1996 which reduced after tax net income by $8.4 million, or $.21 per share. (2) Reflects 2-for-1 stock dividend on January 10, 1997 SALES 95 . . . . . . . $2.56 Billion 96 . . . . . . . . . . . $2.64 Billion 97 . . . . . . . . . . . . . . $2.83 Billion EARNINGS PER SHARE 95 . . . . . . . $1.18 96 . . . . . . . . . . . $1.35(1) 97 . . . . . . . . . . . . . . $1.49 LONGS DRUG STORES 1 [LOGO] "SHARPER MARKETING, A CUTTING EDGE PHARMACY AND UNSURPASSED SERVICE ARE FUELING OUR GROWTH" LONGS DRUG STORES 2 Bob Long Chairman of the Board Chief Executive Officer [PHOTO] Steve Roath President M E S S A G E T O S T O C K H O L D E R S Fiscal 1997 was an excellent year for Longs. The many strategic initiatives we began implementing two years ago continued to drive improved performance at all levels of the Company. We achieved solid revenue and earnings growth, as well as increases in same store sales, pharmacy sales, customer count, average transaction and sales per square foot. Beyond these important financial measures, Longs has also grown stronger in the key elements that underlie any successful retailer. By applying customer-focused category management techniques, upgrading our information technologies and significantly strengthening our pharmacy operations, we've given our store management and employees the tools they need to do their jobs better. And it shows, in the excitement and enthusiasm of Longs employees, in the positive remarks we hear from our customers, and in our improved sales performance. Today, Longs is a stronger, better positioned, and more competitive chain than it was just two and a half years ago, and we intend to continue building on the momentum we have established. STRONG SALES AND EARNINGS GROWTH For the 53 weeks ended January 30, 1997, Longs sales were $2.8 billion, up 7% from $2.6 billion in the 52 weeks of fiscal 1996. On a 52-week comparable basis, same store sales rose 4.1% in fiscal 1997, and pharmacy sales increased 9.0%. We are especially encouraged by the strong performance in pharmacy, as this category represents 33% of our total sales. LONGS DRUG STORES 3 [PHOTO] Net income grew to $58.6 million, or $1.49 per share, from $46.2 million a year ago when we took a one-time pre-tax charge of $14 million to settle a lawsuit. Without the charge, our fiscal 1996 earnings would have been $54.6 million, or $1.35 per share. These earnings per share figures reflect the two-for-one stock split that we declared in January 1997. This solid 7% growth in Longs' sales and profitability--which we achieved despite a weaker than expected holiday selling season for Longs and most retailers and a still sluggish economy in Hawaii that held back our sales growth in the state--was in line with our goals for the year, and we feel our results illustrate how our initiatives to enhance value, convenience and the overall shopping experience for our customers have translated into strong performance throughout our chain. MEETING AND EXCEEDING CUSTOMER EXPECTATIONS Longs has always had a tradition of decentralized decision making, giving store managers broad authority to stock selected merchandise based on their knowledge of local customer demand. Over the past two years, we have begun augmenting this proven approach with more active management of core categories by our merchandising team at the corporate office. In this program--which has been a tremendous success--category managers at our corporate headquarters analyze customer buying behavior throughout our 339 store chain and develop fact-based strategies for enhancing core product selection, display and promotion. With store managers and employees doing an excellent job tailoring execution of these plans to their stores, the result has been a product offering that provides greater focus and consumer appeal. LONGS DRUG STORES 4 Category management leverages our greatly enhanced management information system, which enables us to track chainwide sales through our checkout scanning system, analyze operating data at both the store and regional level, develop detailed product layout designs, and much more. It has significantly strengthened sales in each of the categories under management, including cosmetics/toiletries, photo and over-the-counter drugs. A PHARMACY "BETTER THAN THE BEST" Technology is also key to the improvements we have made in our pharmacy departments. For example, in fiscal 1997 we completed testing and began rolling out our new computer-aided prescription filling system, which frees our pharmacists to spend more time consulting with customers. And our automated Pharmacy Replenishment Ordering System has greatly increased the efficiency and speed of re-stocking pharmaceutical products. Fiscal 1997 was also the first full year of our Integrated Health Concepts (IHC) subsidiary. IHC is designed to maintain Longs' leadership in the rapidly changing healthcare marketplace by marketing value-added pharmacy services to managed care providers, including large employer groups, HMOs, insurance companies and others. Response to IHC has been excellent, and, as the managed care revolution has put inevitable downward pressure on pharmaceutical prices, we believe Longs will be well positioned to offset much of this margin decline with both growing sales and enhanced service offerings. [PHOTO] LONGS DRUG STORES 5 AN EXPANDING MARKET PRESENCE In addition to improving our sales performance and operating efficiency over the past 24 months, we continued to broaden our store base. In fiscal 1997, we opened ten new stores, relocated one store and closed one underperforming unit. Our growth strategy requires an expansion into markets other than those in which we already have stores. Such an opportunity is Las Vegas. With our strong presence in Southern California and seven successful stores in and around Reno, Nevada, Las Vegas is a natural extension for Longs. We are now developing a presence in Las Vegas and plan to have a total of six stores there by the end of this fiscal year. Overall, our expansion plans for fiscal 1998 are to open a total of 15 to 17 new stores. GROWING MOMENTUM IN FISCAL 1998 AND BEYOND Longs has accomplished a great deal in the past year, but we believe there is still plenty of room for further improvement. In fiscal 1998 we will continue to refine our category management implementation to fuel our same store sales growth. We will also assess other customer-service initiatives, such as increasing the number of stores that offer either extended hours or 24-hour operation. We will implement new applications to maximize the value of our information systems investment. And we will continue to hire and train the best managers and employees in the industry. [PHOTO] LONGS DRUG STORES 6 [PHOTOS] Indeed, people have always been the key to Longs' success, and we want to thank each of the 16,500 individuals in the Longs family for their contributions to our past and future accomplishments. We also thank you, our stockholders--including the nearly 11,000 Longs employees who are members of the Company's profit sharing plan--for your continued support. /s/ S.D. Roath /s/ Bob Long -------------------- ------------------------------ S.D. Roath R. M. Long President Chief Executive Officer April 7, 1997 LONGS DRUG STORES 7 I N T E R N A L I N I T I A T I V E S Longs' success begins with store-level performance. A fast, friendly and fruitful shopping experience has been the hallmark of Longs stores for almost six decades. Today we are building on that tradition with a variety of initiatives designed to ensure that our customers find what they want and find it easily, while receiving unsurpassed service and value. CATEGORY MANAGEMENT Longs stores are well known for carrying unique and often unusual merchandise that reflects the particular needs of local customers. To accomplish this, our store managers have the authority to make independent buying decisions. This autonomy is a key reason why our customers think of Longs as their local corner drug store and why they make us a regular stop on their weekly shopping trips. It is an aspect of our Company that will never change. [PHOTO] Recently, however, we have added a valuable element of control in managing the standard core product categories in all our stores. Category managers at our headquarters now use information gathered from our entire 339 store chain to develop successful product mix, to position categories effectively on the sales floor, and to carry out traffic building promotions. TECHNOLOGY-DRIVEN PRODUCTIVITY Controlling core categories from the corporate office also improves our purchasing efficiency. It leverages our buying clout and enhances our ability to negotiate consistent supply and better costs of goods. In addition, automated repurchasing systems help reduce inventory costs while improving the speed of our replenishment capability. It has also improved our ability to maintain in-stock positions throughout the chain. We now have approximately 11,000 stock keeping units available for rapid replenishment--more than 25% of the non-prescription items we carry in our stores. Equally encouraging, we are steadily increasing the share of our product volume that is controlled by our own distribution system--in fiscal 1997, we surpassed 45%--a trend that improves our gross margin and inventory control. LONGS DRUG STORES 8 [LOGO] "WE HAVE STEADILY IMPROVED OUR STORE-LEVEL PRODUCTIVITY AND OVERALL OPERATING EFFICIENCY" LONGS DRUG STORES 9 [LOGO] "LONGS IS EXTENDING ITS PRESENCE IN BOTH NEW AND EXISTING MARKETS" LONGS DRUG STORES 10 E X T E R N A L E X P A N S I O N As we have strengthened our internal performance, Longs has also continued to expand its store base. Our strategy has been to focus on finding high quality sites in our existing markets that enhance our strong position in our four-state operating area. At the same time, we continue to assess opportunities to expand into new markets. As we do so, we often seek multiple unit acquisitions that will give us an immediate strong market presence and enable us to capitalize on economies of scale in distribution, marketing and training. EXISTING MARKETS While Longs has a very strong presence and name recognition in California, there are still opportunities to add new stores, as well as to upgrade and expand existing units. In fiscal 1997, we added nine new stores in the state, both in urban markets as well as smaller towns. To serve the thriving San Diego metropolitan area, for example, we added three stores. At the same time, we also entered the smaller Central Valley ranching town of Prather, and expanded the size of an existing store in the growing community of Orcutt, near Santa Maria. Before opening any new store, we conduct extensive research to evaluate market demand and existing store capacity. And, of course, we always hit the ground running by stocking key local items--such as fishing tackle at our new Reno store--to serve the unique needs of the local customer base. NEW MARKETS When we enter new operating areas, we choose markets that are logical extensions of our established operations, such as communities near or contiguous to current markets. We followed this strategy in fiscal 1997 when we entered Las Vegas, which is between Reno, Nevada, where we now have a strong base of seven stores, and Southern California. We entered this new market by acquiring three stores from local retailers Rainbow Drugs and Drug Emporium. Although not yet open as Longs units, these new stores provide us a strong initial foundation on which to build. Based on our market research we are very optimistic about this move. We believe Longs' proven combination of service-oriented pharmacy, broad selection and unique merchandise mix will be very well received in Las Vegas. LONGS DRUG STORES 11 M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S RESULTS OF OPERATIONS SEASONAL BUSINESS AND 53 WEEK YEAR The retail drug store business is seasonal, peaking in the fourth quarter due to the Thanksgiving and Christmas holidays and the cold and flu season. The Company's fiscal year ends the last Thursday in January. Fiscal year and fourth quarter of 1997 had one additional week of operations compared to fiscal year and fourth quarter of 1996 and 1995. Sales benefited as a result, offset somewhat by the impact of fewer holiday shopping days between the Thanksgiving and Christmas holidays. SALES (THOUSANDS) FY 1997 FY 1996 FY 1995 - ------------------------------------------------------------------ Total Sales $ 2,828,338 $ 2,644,376 $ 2,558,269 - ------------------------------------------------------------------ Sales Growth - 53rd week (FY 97 only) 2.1% Same Store Sales Growth 52 weeks 4.1% 0.7% (1.5%) New Stores 52 weeks 0.8% 2.7% 3.9% - ------------------------------------------------------------------ Total Sales Growth 7.0% 3.4% 2.4% - ------------------------------------------------------------------ New Stores 10 15 18 Closed Stores (1) (4) (6) - ------------------------------------------------------------------ Number of Stores 337 328 317 - ------------------------------------------------------------------ About one-third of the sales growth is due to an extra week of operations in fiscal 1997, compared to fiscal 1996 and fiscal 1995. The steady improvement in same store sales, stores open more than one year, was due to strong pharmacy sales and successful marketing of non-pharmacy categories. Sales were negatively impacted by five fewer shopping days between Thanksgiving and Christmas and severe weather in California in the fourth quarter of fiscal 1997. PHARMACY SALES FY 1997 FY 1996 FY 1995 - ----------------------------------------------------- Pharmacy Percent of Total Sales 33.1% 32.0% 30.1% - ----------------------------------------------------- Managed Care Percent of Pharmacy Sales 80.2% 76.5% 71.3% - ----------------------------------------------------- Pharmacy sales grew slightly as a percentage of total sales as a result of strong pharmacy sales growth. Pharmacy sales increased 9.0% in fiscal 1997 on a 52-week comparable basis, 10.7% in fiscal 1996, and 7.2% in fiscal 1995. Pharmacy sales reimbursed through managed care arrangements continues to increase but at a lesser rate than prior years. GROSS MARGIN FY 1997 FY 1996 FY 1995 - ----------------------------------------------------- Gross Margin Percentage 26.7% 26.4% 26.0% - ----------------------------------------------------- Increased gross margin in fiscal 1997 over fiscal 1996 was primarily the result of improved buying, product mix, and promotional strategies. These increases offset decreases in pharmacy gross margin consistent within the drug chain industry. The Company uses the LIFO (last-in first-out) method of accounting for its inventories. The LIFO provision was $3.4 million in fiscal 1997, compared to $4.8 million in fiscal 1996 and $1.7 million in fiscal 1995. The LIFO provision fluctuates with inflation rates and product mix, and is included in cost of merchandise sold. OPERATING AND ADMINISTRATIVE EXPENSES (THOUSANDS) FY 1997 FY 1996 FY 1995 - --------------------------------------------------------- Operating and Administrative Expenses $ 656,742 $ 607,157 $ 584,587 - --------------------------------------------------------- Operating and Administrative Expenses as a Percent of Sales 23.2% 23.0% 22.9% - --------------------------------------------------------- Operating and administrative expenses as a percent of sales increased to 23.2% in fiscal 1997, compared to 23.0% in fiscal 1996, and 22.9% in fiscal 1995. The increase was primarily due to an increase in wages that resulted from the new stores, costs related to the implementation of category management, and other costs which were in line with our expectations. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA) (THOUSANDS) FY 1997 FY 1996 FY 1995 - --------------------------------------------------------------- EBITDA $ 141,385 $ 117,184 $ 118,642 - --------------------------------------------------------------- EBITDA as a Percent of Sales 5.0% 4.4% 4.6% - --------------------------------------------------------------- EBITDA, excluding impact of lawsuit settlement in FY 1996 $ 141,385 $ 131,184 $118,642 EBITDA as a Percent of Sales, excluding impact of lawsuit settlement in FY 1996 5.0% 5.0% 4.6% - --------------------------------------------------------------- EBITDA as a percent of sales continue to be strong, consistent with preceding years. INCOME BEFORE TAXES FY 1997 FY 1996 FY 1995 - ------------------------------------------------------------------ Income Before Taxes as a Percent of Sales 3.4% 2.9% 3.2% - ------------------------------------------------------------------ Income Before Taxes as a Percent of Sales, excluding impact of lawsuit settlement in FY 1996 3.4% 3.4% 3.2% - ------------------------------------------------------------------ Income before taxes as a percent of sales remained consistent with prior year with an improvement in gross margin offset by increased operating and administrative expenses. LAWSUIT SETTLEMENT In fiscal 1996 the Company had a one-time $14.0 million pre-tax charge to operations to settle a lawsuit. The after tax impact of the settlement was $8.4 million or $0.21 per share. The details of the settlement are discussed in the footnotes to the financial statements. Operating comparisons to prior year are made with and without the settlement to facilitate analysis. LONGS DRUG STORES 12 INCOME TAXES The Company's effective income tax rates were 39.9% in fiscal 1997, 39.8% in fiscal 1996 and 39.7% in fiscal 1995. The California corporate tax rate was reduced from 9.3% to 8.8% for tax years beginning after January 1, 1997. NET INCOME FY 1997 FY 1996 FY 1995 - ------------------------------------------------------------- Net Income as a Percent of Sales 2.1% 1.7% 1.9% - ------------------------------------------------------------- Net Income as a Percent of Sales, excluding impact of lawsuit settlement in FY 1996 2.1% 2.1% 1.9% - ------------------------------------------------------------- Net income as a percent of sales is consistent with fiscal 1996 (excluding the settlement) due to improved gross margins offset by increased operating and administrative expenses. EARNINGS PER SHARE FY 1997 FY 1996 FY 1995 - ---------------------------------------------------------- Earnings per Share $ 1.49 $ 1.15 $ 1.18 Percent increase in Earnings per Share 30.2% (2.7%) (8.2%) - ---------------------------------------------------------- Earnings per Share, excluding impact of lawsuit settlement in FY 1996 $ 1.49 $ 1.35 $ 1.18 Percent increase in Earnings per Share excluding impact of lawsuit settlement in FY 1996 10.1% 15.0% (8.2%) - ---------------------------------------------------------- On January 10, 1997, the Company issued a two-for-one stock split effected in the form of a stock dividend. All per share amounts have been adjusted to reflect the split. Earnings per share increased at a greater rate than net income due to stock repurchases in each of the last three fiscal years. LIQUIDITY AND CAPITAL RESOURCES CASH POSITION (THOUSANDS) FY 1997 FY 1996 FY 1995 - ---------------------------------------------------------- Cash and Cash Equivalents at Year End $ 22,834 $ 49,314 $ 57,518 - ---------------------------------------------------------- Cash and cash equivalents in fiscal 1997 were lower than fiscal 1996 due to increased inventories, particularly in the stores' pharmacies and in the pharmacy distribution warehouse, the purchase of a $12 million warehouse in fourth quarter, and the actual payment of the lawsuit settlement. Cash and cash equivalents in fiscal 1996 were lower than fiscal 1995 as a result of the acquisition of six stores in Hawaii and approximately $25 million more in stock repurchases in fiscal 1996 over fiscal 1995. CASH FROM OPERATIONS (THOUSANDS) FY 1997 FY 1996 FY 1995 - --------------------------------------------------------- Cash provided by Operating Activities $ 80,579 $ 94,299 $ 84,069 - --------------------------------------------------------- The decrease in cash provided by operations was primarily due to the payment of the lawsuit settlement in fiscal 1997. Offsetting this decrease were improvements in sales and margins and the benefit from an extra week of operations in fiscal 1997. CAPITAL EXPENDITURES (THOUSANDS) FY 1997 FY 1996 FY 1995 - ---------------------------------------------------------------- Cash used by Investing Activities $ (65,117) $ (46,093) $ (34,773) - ---------------------------------------------------------------- Capital expenditures increased in fiscal 1997 primarily due to the construction and purchase of a $12 million warehouse in Southern California that replaced a leased facility. Management information systems were also expanded during fiscal 1997 to extend an open network system between the corporate offices and all stores. Additionally, the company is continuing its investment in open technologies to deliver new systems for pharmacy, human resources management, category management, warehousing and product ordering. Capital expenditures for fiscal 1998 are expected to rise with additional new stores and fixture upgrades in existing stores due to category management initiatives. During fiscal 1997, the Company opened its first store in the Las Vegas market. The Company agreed to acquire 3 stores, 2 of which will open in early fiscal 1998, from existing operators in Las Vegas and will operate them under the Rainbow Pharmacy name until fall of next year. In fiscal 1996, the Company purchased the inventory and fixed assets of six stores and the merchandise inventories of additional stores in Hawaii from PayLess Drug Stores Northwest, Inc. FINANCING ACTIVITIES (THOUSANDS) FY 1997 FY 1996 FY 1995 - ----------------------------------------------------------------- Cash used by Financing Activities $ (41,942) $ (56,410) $ (34,290) - ----------------------------------------------------------------- Stock repurchases were $21.9 million in fiscal 1997, $35.7 million in fiscal 1996, and $11.1 million in fiscal 1995, the primary reason for fluctuations in financing activities. Stock repurchases are at the discretion of the Board of Directors under an authorization approved in November 1994 and are impacted by stock price and available cashflow. Expenditures for capital projects, dividends, and stock repurchases have been, and are expected to continue to be, funded from operation and cash reserves. To maintain desired working capital, the Company may periodically use short-term lines of credit. LONGS DRUG STORES 13 STATEMENTS OF CONSOLIDATED INCOME Years Ended Jan 30, 1997 Jan 25, 1996 Jan 26, 1995 ----------------------------------------------------- THOUSANDS EXCEPT PER SHARE SALES $ 2,828,338 $ 2,644,376 $ 2,558,269 Cost and Expenses Cost of merchandise sold 2,074,084 1,946,391 1,892,851 Operating and administrative 656,742 607,157 584,587 Lawsuit settlement 14,000 ---------------------------------------- Income before taxes 97,512 76,828 80,831 Taxes on Income 38,900 30,600 32,100 ---------------------------------------- NET INCOME $ 58,612 $ 46,228 $ 48,731 ---------------------------------------- Per Common Share Net Income $ 1.49 $ 1.15 $ 1.18 Dividends $ .56 $ .56 $ .56 Weighted Average Number of Shares Outstanding 39,303 40,364 41,402 ---------------------------------------- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INDEPENDENT AUDITORS' REPORT LONGS DRUG STORES CORPORATION: We have audited the accompanying consolidated balance sheets of Longs Drug Stores Corporation and its subsidiary as of January 30, 1997 and January 25, 1996, and the related statements of consolidated income, consolidated stockholders' equity and consolidated cash flows for each of the three fiscal years in the period ended January 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the companies at January 30, 1997 and January 25, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP San Francisco, California March 7, 1997 LONGS DRUG STORES 14 CONSOLIDATED BALANCE SHEETS JAN 30, 1997 JAN 25, 1996 ---------------------------- THOUSANDS ASSETS Current Assets Cash and equivalents $ 22,834 $ 49,314 Pharmacy and other receivables 49,911 54,388 Merchandise inventories 356,933 316,497 Deferred income taxes 19,757 23,640 Other 1,939 2,687 ------------------------- Total current assets 451,374 446,526 ------------------------- Property Land 88,269 79,998 Buildings and leasehold improvements 337,486 313,766 Equipment and fixtures 270,337 247,831 Beverage licenses 7,240 7,163 ------------------------- Total property at cost 703,332 648,758 Less accumulated depreciation 285,943 253,461 ------------------------- Property, net 417,389 395,297 ------------------------- Other Non-Current Assets 10,886 11,734 ------------------------- Total $ 879,649 $ 853,557 ------------------------- ------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 164,369 $ 148,428 Employee compensation and benefits 55,957 59,843 Taxes payable 34,294 37,808 Current portion of guarantee of Profit Sharing Plan debt 2,363 2,174 Other 29,526 39,094 ------------------------- Total current liabilities 286,509 287,347 ------------------------- Guarantee of Profit Sharing Plan Debt 5,192 8,311 ------------------------- Deferred Income Taxes 34,362 35,132 ------------------------- Stockholders' Equity Common stock (38,968,000 and 39,632,000 outstanding) 19,484 19,816 Additional capital 109,327 107,608 Common stock contribution to Profit Sharing Plan 9,955 4,550 Guarantee of Profit Sharing Plan debt (7,555) (10,485) Retained earnings 422,375 401,278 ------------------------- Total stockholders' equity 553,586 522,767 ------------------------- Total $ 879,649 $ 853,557 ------------------------- ------------------------- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. LONGS DRUG STORES 15 STATEMENTS OF CONSOLIDATED CASH FLOWS
------------------------------------------------------ YEARS ENDED JAN 30, 1997 JAN 25, 1996 JAN 26, 1995 ------------------------------------------------------ THOUSANDS OPERATING ACTIVITIES Receipts from customers $ 2,832,563 $ 2,645,211 $ 2,554,596 Payments for merchandise (2,098,579) (1,968,353) (1,901,012) Payments for operating and administrative expenses (607,127) (551,179) (541,421) Income tax payments (46,278) (31,380) (28,094) ---------------------------------------- Net cash provided by operating activities 80,579 94,299 84,069 ---------------------------------------- INVESTING ACTIVITIES Payments for property additions and other assets (70,023) (49,174) (39,195) Receipts from property dispositions 4,906 3,081 4,422 ---------------------------------------- Net cash used in investing activities (65,117) (46,093) (34,773) ---------------------------------------- FINANCING ACTIVITIES Proceeds from sale of common stock to Profit Sharing Plan 2,000 2,017 Repurchase of common stock (21,888) (35,730) (11,077) Dividend payments (22,054) (22,697) (23,213) ---------------------------------------- Net cash used in financing activities (41,942) (56,410) (34,290) ---------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS (26,480) (8,204) 15,006 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 49,314 57,518 42,512 ---------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 22,834 $ 49,314 $ 57,518 ---------------------------------------- ---------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 58,612 $ 46,228 $ 48,731 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,873 40,356 37,811 Deferred income taxes 3,113 (6,145) (2,968) Restricted stock awards 1,669 1,478 1,889 Common stock contribution to benefit plans 9,460 4,550 5,515 Tax benefits credited to stockholders' equity 90 127 155 Changes in assets and liabilities: Pharmacy and other receivables 4,477 (484) (3,265) Merchandise inventories (40,436) (21,151) (14,822) Other current assets 748 47 (197) Current liabilities (1,027) 29,293 11,220 ---------------------------------------- Net cash provided by operating activities $ 80,579 $ 94,299 $ 84,069 ----------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. LONGS DRUG STORES 16 STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Profit Guarantee Sharing of Profit Total Common Stock Additional Plan Sharing Retained Stockholders' Thousands Shares Amount Capital Contributions Plan Debt Earnings Equity BALANCE AT JANUARY 27, 1994 41,308 $20,654 $104,518 $ 5,530 $(15,662) $384,567 $499,607 ----------------------------------------------------------------------------------------------- Net income 48,731 48,731 Dividends ($.56 per share) (23,213) (23,213) Profit Sharing Plan: Issuance of stock for FY94 contribution 296 148 5,456 (5,530) (74) 0 Stock portion of FY95 contribution 5,515 5,515 Purchase of stock from plan (210) (105) (3,517) 53 (3,569) Reduction of plan debt 2,481 2,481 Restricted stock awards 180 90 1,845 (46) 1,889 Tax benefits related to employee stock plans 155 155 Repurchase of common stock (456) (228) (1,095) (6,185) (7,508) Acquisition of Bill's Drugs, Inc., net of related costs 2 1 9 10 BALANCE AT JANUARY 26, 1995 41,120 $20,560 $107,216 $ 5,515 $(13,181) $403,988 $524,098 ----------------------------------------------------------------------------------------------- Net income 46,228 46,228 Dividends ($.56 per share) (22,697) (22,697) Profit Sharing Plan: Issuance of stock for FY95 contribution 352 176 5,427 (5,515) (88) 0 Stock portion of FY96 contribution 4,550 4,550 Sale of stock to plan 118 59 1,988 (30) 2,017 Purchase of stock from plan (228) (114) (4,037) 58 (4,093) Reduction of plan debt 2,696 2,696 Restricted stock awards 60 30 1,463 (15) 1,478 Tax benefits related to employee stock plans 127 127 Repurchase of common stock (1,790) (895) (4,449) (26,293) (31,637) BALANCE AT JANUARY 25, 1996 39,632 $19,816 $107,608 $ 4,550 $(10,485) $401,278 $522,767 ----------------------------------------------------------------------------------------------- Net income 58,612 58,612 Dividends ($.56 per share) (22,054) (22,054) Profit Sharing Plan: Issuance of stock for FY96 contribution 181 91 4,010 (4,055) (46) 0 Contribution in cash (495) (495) Stock portion of FY97 contribution 9,955 9,955 Sale of stock to plan 90 45 1,978 (23) 2,000 Purchase of stock from plan (179) (90) (3,925) 45 (3,970) Reduction of plan debt 2,930 2,930 Restricted stock awards 72 36 1,651 (18) 1,669 Tax benefits related to employee stock plans 90 90 Repurchase of common stock (828) (414) (1,995) (15,509) (17,918) BALANCE AT JANUARY 30, 1997 38,968 $19,484 $109,327 $ 9,955 $ (7,555) $422,375 $553,586 -----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. LONGS DRUG STORES 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING POLICIES THE CONSOLIDATED FINANCIAL STATEMENTS include Longs Drug Stores Corporation and its wholly-owned subsidiary, Longs Drug Stores California, Inc. All inter- company accounts and transactions have been eliminated. FISCAL YEARS end the last Thursday of January. Most fiscal years have four quarters of thirteen weeks each, totaling 52 weeks. Every five to six years the fourth quarter has an additional week which is the case with the current fiscal year 1997. References made to the 1997, 1996, and 1995 fiscal years refer to the 53-week period ended January 30, 1997, and the 52-week periods ended January 25, 1996, and January 26, 1995. Reclassifications have been made to certain prior years' financial information to make it comparable to the current year presentation. NATURE OF OPERATIONS - The Company operates retail drug stores in California, Hawaii, Colorado and Nevada with a majority of our sales concentrated in California. Prescription drugs, over-the-counter health care products, photo and photo processing, cosmetics and greeting cards are our core merchandise categories. Additional significant categories include food, toiletries and seasonal merchandise. Items sold through promotional advertising represent a significant portion of sales. STOCK SPLIT - In November 1996, the Board of Directors declared a two-for-one stock split. The stock split was effected in the form of a two-for-one stock dividend to shareholders of record at the close of business on December 3, 1996 and was distributed on January 10, 1997. All share and per share amounts presented in the accompanying consolidated financial statements have been restated to reflect the stock split. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from those estimates. CASH AND EQUIVALENTS include investments with original maturities of three months or less that are easily convertible to cash. MERCHANDISE INVENTORIES are valued using the last-in, first-out (LIFO) method. The excess of specific cost over LIFO values was $133.2 and $129.8 million at the 1997 and 1996 fiscal year ends. PROPERTY is depreciated using the straight-line method and estimated useful lives of twenty to thirty-three years for buildings, the shorter of life of the lease or estimated useful life for leasehold improvements, and three to twenty years for equipment, fixtures and beverage licenses. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Effective at the end of the third quarter of fiscal year 1996, the Company adopted Statement of Financial Accounting Standards No. 121 which requires that long-lived assets such as buildings or other property used by an entity be reviewed to ensure that their current value can be recovered by the cash flows from future operations. This pronouncement had no material effect on the Company's financial position or results of operations. OTHER NON-CURRENT ASSETS consist of purchased pharmacy customer files and goodwill and are amortized under a straight line method over estimated useful lives of five to ten years. NEW STORE OPENING COSTS, primarily labor to stock shelves, pre-opening advertising, rent and store supplies, are charged to expense as incurred. ADVERTISING - Advertising costs are expensed as incurred and were $22.5, $21.9, and $23.3 million for fiscal years 1997, 1996, and 1995. INCOME TAXES - The Company accounts for its taxes in accordance with SFAS No. 109 which requires the use of the asset and liability method of accounting for deferred income taxes. Deferred income taxes are recorded based upon the differences between the financial statement and tax basis of assets and liabilities. STOCK-BASED COMPENSATION - The Company adopted the disclosure requirements of SFAS No. 123 (Accounting for Stock-Based Compensation) in fiscal year 1996. The Company's only stock-based compensation is restricted stock which is valued at its fair market value at the date of grant, and recorded as compensation expense over the vesting period. As a result, there are no additional required disclosures. NET INCOME PER COMMON SHARE is calculated by dividing net income by the weighted average number of shares outstanding. LEASES AND OTHER OBLIGATIONS A significant portion of store properties are leased, having original terms ranging from ten to twenty-five years with renewal options covering up to twenty additional years in five-year to ten-year increments. Leases provide for minimum annual rent with provisions for additional rent based on a percentage of sales. Lease rentals for fiscal years 1997, 1996, and 1995 were $37.3, $34.5, and $30.9 million, of which $29.6, $27.5, and $23.4 million represent minimum payments. Total minimum rental commitments for non-cancelable leases in effect at 1997 year end were $31.1, $31.3, $30.2, $29.4, and $27.8 million for fiscal years 1998 through 2002, and $286.8 million thereafter. At fiscal year ends 1997 and 1996, the Company had an unsecured revolving line of credit of $30.0 million at prevailing interest rates. There was $30.0 million and $29.8 million available for use at the 1997 and 1996 fiscal year ends. The line of credit expires on June 30, 1998. Employee Compensation and Benefits The Company has approximately 16,500 full-time and part-time employees as of January 30, 1997. Virtually all full-time employees are covered by medical, dental and life insurance programs paid primarily by the Company. The Company also has a 401(k) plan under which employees may make voluntary contributions. LONGS DRUG STORES 18 Full-time employees with over 1,000 hours of service are entitled to Profit Sharing Plan benefits that are funded entirely by the Company. Annual contributions to the plan were $11.0 million for fiscal years 1997, 1996 and 1995. Contributions are made in cash and common stock. In April 1995, the Board of Directors approved the Longs Drug Stores Corporation Deferred Compensation Plan of 1995. The plan provides eligible employees with the opportunity to defer a specified percentage of their cash compensation. Resulting obligations will be payable on a date selected by the employee participant in accordance with the terms of the plan. The total deferred compensation obligations under the plan may not exceed $10.0 million. Deferred compensation was $2.0 million and $0.6 million at the 1997 and 1996 fiscal year ends. TAXES ON INCOME Significant components of the Company's deferred tax assets and liabilities as of January 30, 1997 and January 25, 1996 are as follows: (Thousands) FY 1997 FY 1996 - -------------------------------------------------------------------------------- Deferred Tax Assets: Reserve for vacation pay $ 8,327 $ 7,398 Reserve for workers' compensation 6,626 7,493 State income tax 2,425 2,111 Reserve for health benefits 1,679 1,683 Lawsuit settlement 5,600 Other 11,156 9,456 - -------------------------------------------------------------------------------- 30,213 33,741 - -------------------------------------------------------------------------------- Deferred Tax Liabilities: Depreciation 31,742 32,836 Basis of property 3,657 3,664 Inventories 1,347 1,425 Other 8,072 7,308 - -------------------------------------------------------------------------------- 44,818 45,233 - -------------------------------------------------------------------------------- Net deferred tax liability $14,605 $11,492 - -------------------------------------------------------------------------------- Income tax expense is summarized as follows: (Thousands) FY 1997 FY 1996 FY 1995 - -------------------------------------------------------------------------------- CURRENT Federal $27,849 $28,367 $26,992 State 7,938 8,378 8,076 - -------------------------------------------------------------------------------- 35,787 36,745 35,068 DEFERRED 3,113 (6,145) (2,968) - -------------------------------------------------------------------------------- Total $38,900 $30,600 $32,100 - -------------------------------------------------------------------------------- The reconciliation between the federal statutory tax rate and the Company's effective tax rates are as follows: (THOUSANDS) FY 1997 Percent - -------------------------------------------------------------------------------- Federal income taxes at statutory rate $34,129 35.00% State income tax net of federal benefits 5,330 5.47% Benefits of ESOP dividends (1,288) (1.32%) Other 729 0.74% - -------------------------------------------------------------------------------- $38,900 39.89% - -------------------------------------------------------------------------------- The effective tax rate in fiscal years 1996 and 1995 differ from the federal statutory rate of 35%, primarily due to state income taxes offset by the benefit of ESOP dividends. GUARANTEE OF PROFIT SHARING PLAN DEBT In March 1989, the Company sold 1,393,728 shares of Longs' common stock to the Profit Sharing Plan for $25.0 million. The Plan financed this purchase with a ten-year loan guaranteed by Longs Drug Stores California, Inc. The Company has no obligation to repurchase outstanding shares held by the Plan. Consequently, a Guarantee of Profit Sharing Plan debt is shown on the accompanying balance sheets with a corresponding reduction of Stockholders' Equity. Loan repayments are made with dividends on allocated and unallocated shares held by the Plan and with Company contributions. It is expected that all shares will be allocated within the term of the loan. Members are allocated shares of Longs' common stock equal in value to the cash dividends on their allocated shares used to repay the loan. Periodically, the Company has been willing to repurchase shares to provide the Plan with needed liquidity. Plan shares of the leveraged Employee Stock Ownership Plan (ESOP) were as follows: FY 1997 FY 1996 - -------------------------------------------------------------------------------- Allocated shares 1,075,552 955,434 Unallocated shares 318,176 438,294 - -------------------------------------------------------------------------------- Total 1,393,728 1,393,728 - -------------------------------------------------------------------------------- Loan payments are made in equal quarterly installments of $930,000, which includes interest at 8.4% per year. Dividends paid to the Plan, and used in part to repay principal and interest on the loan totaled $3.2 million for fiscal years 1997, 1996 and 1995. STOCKHOLDERS' EQUITY Authorized capital stock consists of 120 million shares of common stock, $.50 par value, and 30 million shares of preferred stock. Each outstanding share of common stock has a Preferred Stock Purchase Right (expiring in September 2006) which is exercisable only upon the occurrence of certain changes in control events. These new rights replaced previous rights which expired in September 1996. There have been no events that would allow these rights to be exercised. The Company has a Restricted Stock Award program in which certain individuals may be granted stock in the Company, with some restrictions. Recipients have voting rights to the shares and dividends are credited to the shares during the restriction period. However, transfer of ownership of the shares is dependent on continued employment for periods of one to five years. The compensatory portion not yet expensed for these programs ($2.6 million) at January 30, 1997, has been netted against Additional Capital. During fiscal years 1997, 1996, and 1995; 73,600 69,200 and 186,800 shares were awarded under these programs. In November 1994, the Board of Directors authorized a plan to repurchase up to four million shares of the Company's outstanding LONGS DRUG STORES 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS common stock. As of fiscal year 1997, the Company has repurchased 1,739,000 shares at a cost of $32.6 million in connection with the repurchase plan. During fiscal year 1997, the Company also repurchased 179,000 common shares from the Profit Sharing Plan at market values totaling $4.0 million and 438,000 common shares from the T.J. and J.M. Long charitable foundations at market values totaling $9.4 million. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's current financial assets and liabilities, and Guarantee of Profit Sharing Plan debt approximates the estimated fair value. SETTLEMENT OF LAWSUIT The Company's subsidiary, Longs Drug Stores California, Inc. ("Subsidiary"), was named as one of a large number of defendants in two lawsuits filed in United States District Court for the Southern District of Florida, Harvey S. Tropin, as Receiver of Lone Star Trading Company and its subsidiaries and affiliates, as Trustee of Premium Sales Corporation, Plaza Trading Corporation and as the designated corporate representative of Windsor Wholesale Corporation v. Kenneth Thenen, et al. ("Tropin"), and Walco Investments, Inc., et al. v. Kenneth Thenen, et al. ("Walco"). In addition, Subsidiary was named in three cross-complaints by certain co-defendants in Walco. The cases alleged that investors invested in partnerships involved in the business of "diverting" grocery products. It was alleged that many of the diverting transactions were fictitious. The complaints further alleged that a former employee of Subsidiary received bribe payments in return for his willingness to confirm fraudulent transactions, and they claimed that the Subsidiary was secondarily liable for damages based on the acts of its former employee. Several other retailers involved in the grocery business, as well as law firms and banks, were co-defendants in the actions. Plaintiffs in both actions sought damages for the investors' losses, which were alleged to have been several hundred million dollars. In February 1996, the Company concluded settlement negotiations with representatives of the plaintiffs in these actions whereby claims against the Company and its affiliates will be released in exchange for the Company's cash payment of $14 million, in addition to certain contingent insurance proceeds. The Company elected to settle these lawsuits to avoid the expense and the uncertainty of a trial. The after-tax impact of this settlement was $8.4 million, or $.21 per share, and was accrued for in the fourth quarter of fiscal year 1996. The final settlement amount was $13 million and has been paid into an escrow account. This settlement has received final court approval and is the subject of a definitive settlement agreement, but will not become finally effective until required releases are delivered and other contingencies have been resolved, which could occur as early as July 1997. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Thousands except Earnings Dividends Stock Price share data) Sales Gross Profit Net Income Per Share(3) Per Share (3) Range (3) - ----------------------------------------------------------------------------------------------------------------------------------- Quarter 1 $ 665,408 $ 180,831 $ 14,048 $ .35 $ .14 $ 22-24 Quarter 2 681,503 181,719 13,512 .34 .14 19-23 Quarter 3 666,909 176,458 9,374 .24 .14 19-23 Quarter 4 814,518 215,246 21,678 .56 .14 22-25 - ----------------------------------------------------------------------------------------------------------------------------------- FY 1997 $2,828,338 $ 754,254 $ 58,612 $1.49 $ .56 $ 19-25 - ----------------------------------------------------------------------------------------------------------------------------------- Quarter 1 639,801 169,232 13,304 .33 .14 16-17 Quarter 2 646,359 171,012 12,486 .31 .14 17-19 Quarter 3 628,900 166,643 8,815 .22 .14 18-21 Quarter 4 729,316 191,098 11,623(1) .29(1) .14 19-24 - ----------------------------------------------------------------------------------------------------------------------------------- FY 1996 $2,644,376 $ 697,985 $ 46,228(1) $1.15(1) $ .56 $ 16-24 - ----------------------------------------------------------------------------------------------------------------------------------- FIVE YEAR SELECTED FINANCIAL DATA (THOUSANDS EXCEPT SHARE DATA) FY 1997 FY 1996 FY 1995 FY 1994 FY 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Sales $ 2,828,338 $ 2,644,376 $ 2,558,269 $ 2,499,224 $ 2,475,475 Net Income $ 58,612 $ 46,228(1) $ 48,731 $ 52,782(2) $ 52,993 Net Income per Share (3) $ 1.49 $ 1.15(1) $ 1.18 $ 1.28 $ 1.29 Dividends per Share (3) $ .56 $ .56 $ .56 $ .56 $ .56 Total Assets $ 879,649 $ 853,557 $ 827,961 $ 794,804 $ 726,190 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes $14 million lawsuit settlement in fourth quarter and fiscal year 1996, reducing after-tax net income by $8.4 million, or $ .21 per share. (2) Includes cumulative effect of accounting change, increasing net income by $3 million, or $ .08 per share. (3) Per share data restated for two-for-one stock split as of January 10, 1997. LONGS DRUG STORES 20 BOARD OF DIRECTORS AND OFFICERS OF LONGS DRUG STORES BOARD OF DIRECTORS Robert M. Long Chairman of the Board and Chief Executive Officer Richard M. Brooks* Financial Consultant William G. Combs Vice President, Administration (retired) David G. DeSchane Vice President/District Manager (retired) Edward E. Johnston* Insurance Consultant Mary S. Metz, Ph.D.* Dean U.C. Berkeley Extension Ronald A. Plomgren Senior Vice President, Development and Chief Financial Officer Stephen D. Roath President Gerald H. Saito Senior Vice President/District Manager Harold R. Somerset* Business Consultant Donald L. Sorby, Ph.D.* Pharmaceutical Consultant Thomas R. Sweeney Vice President/District Manager (retired) Frederick E. Trotter* President, F.E. Trotter Inc. SENIOR OFFICERS OF LONGS DRUG STORES CALIFORNIA, INC. Robert M. Long** Chairman of the Board and Chief Executive Officer Stephen D. Roath** President Bill M. Brandon Senior Vice President/Regional Manager George A. Duey Senior Vice President/Regional Manager David J. Fong Senior Vice President, Pharmacy Orlo D. Jones** Senior Vice President, Properties and Secretary Ronald A. Plomgren** Senior Vice President, Development and Chief Financial Officer Gerald H. Saito Senior Vice President/District Manager Dan R. Wilson Senior Vice President, Marketing OFFICERS OF LONGS DRUG STORES CALIFORNIA, INC. Leslie C. Anderson Vice President, Personnel Al A. Arrigoni Vice President, Construction and Assistant Secretary Martin A. Bennett Vice President/District Manager Terry D. Burnside Vice President, Merchandise John G. Daleth, Jr. Vice President/District Manager Donald D. England Vice President/District Manager James L. Famini Vice President/District Manager Stephen W. Fryslie Vice President/District Manager J. Richard Johnston Vice President/District Manager Brian E. Kilcourse Vice President and Chief Information Officer Ronald E. Lovelady Vice President/District Manager Sal Petrucelli Vice President/District Manager Michael K. Raphel Vice President, Real Estate and Assistant Secretary Clay E. Selland** Treasurer and Assistant Secretary Kyle J. Westover Vice President, Training Grover L. White** Vice President, Controller and Assistant Secretary Robert W. Wilson Vice President/District Manager TRANSFER AGENT & REGISTRAR ChaseMellon Shareholder Services San Francisco, CA INDEPENDENT AUDITORS Deloitte & Touche LLP San Francisco, CA GENERAL COUNSEL Bell, Rosenberg & Hughes LLP Oakland, CA INQUIRIES Communications concerning stock transfer requirements, lost certificates and changes of address should be directed to the Transfer Agent. Other stockholder or investor inquiries should be directed to: Investor Relations Longs Drug Stores Corporation P.O. Box 5222 Walnut Creek, CA 94596 (510) 937-1170 FORM 10-K The Company's Form 10-K as filed with the Securities and Exchange Commission is available without charge by writing to the Corporate Treasurer. Company financial information is also available on the World Wide Web at HTTP://WWW.SHAREHOLDER.COM/LONGS and through our toll-free telephone service, 1-888-LDG-NEWS. ANNUAL MEETING The Company's annual meeting of stockholders will be held at 11:00 a.m., on May 20, 1997, at the Regional Center for the Arts, 1601 Civic Drive, Walnut Creek, CA. All stockholders are cordially invited to attend. FORWARD-LOOKING INFORMATION This report contains certain forward-looking statements regarding the Company's expected performance for future periods including same store sales and new store openings. Actual results for such periods may materially differ. Such forward-looking statements involve risks and uncertainties, including risks of changing market conditions in the overall economy and the retail industry, consumer demand, the opening of new stores, actual advertising expenditures by the Company, the success of the Company's advertising and merchandising strategy and other factors detailed from time to time in the Company's annual and other reports filed with the Securities and Exchange Commission. Credits: Design-Vargas Marketing Group * Member of Audit Committee ** Also an officer of Longs Drug Stores Corporation LONGS DRUGS 141 North Civic Drive P.O. Box 5222 Walnut Creek, CA 94596 (510) 937-1170 EX-23 4 EXHIBIT 23 [LOGO-LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2- 97578, 33-12653, 33-54959, and 33-60005 of Longs Drug Stores Corporation on Form S-8 of our report dated March 7, 1997 incorporated by reference in this Annual Report on Form 10-K of Longs Drug Stores Corporation for the fiscal year ended January 30, 1997. /s/ Deloitte & Touche LLP Deloitte & Touche LLP San Francisco, California April 14, 1997 EX-27 5 FDS
5 1,000 12-MOS JAN-30-1997 JAN-26-1996 JAN-30-1997 22,834 0 49,911 0 356,933 451,374 703,332 285,943 879,649 286,509 0 0 0 19,484 553,586 879,649 2,828,338 0 2,074,084 2,730,826 0 0 0 97,512 38,900 58,612 0 0 0 58,612 1.49 0
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