SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

---

(Mark One)

|/x/                                          | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|-------------------------------------------- | -----------------------------------------------------------------------------------------
|For the quarterly period ended July 26, 2001
|/ /                                          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 1-8978

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

Maryland

68-0048627(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)141 North Civic Drive
Walnut Creek, California

94596(Address of principal executive offices)

(Zip Code)


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

---

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

Yes  X       No

There
were 37,864,261 shares of common stock outstanding as of August 23, 2001.

---

Table of Contents

|PART IFINANCIAL INFORMATION |                | 
|---------------------------- | -------------- | 
|                             | Item 1         | 
|                             | Item 2         | 
|                             | Item 3         | 
|PART IIOTHER INFORMATION    |                | 
|                             | Item 4         | 
|                             | Item 6         | 
|                             | Signature Page | 

---



PART IFINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Statements of Condensed Consolidated Income (unaudited)

|                                               |                              | For the Quarter Ended |           | For the Two Quarters Ended |  
|---------------------------------------------- | ---------------------------- | --------------------- | --------- | -------------------------- | -
|
|
|Sales                                          |                              | $                     | 1,041,926 |                            | $
|Cost and expenses:                             |                              |                       |           |                            |  
|                                               | Cost of merchandise sold     |                       |           | 771,862                    |  
|                                               | Operating and administrative |                       |           | 247,837                    |  
|                                               | Provision for store closures |                       |           |                           |  
|                                               | Interest expense             |                       |           | 3,801                      |  
|                                               | Interest income              |                       |           | (220                       | )
|                                               |                              |                       |           |                            |  
|Income before taxes on income                  |                              |                       | 18,646    |                            |  
|Taxes on income                                |                              |                       | 7,400     |                            |  
|                                               |                              |                       |           |                            |  
|Net income                                     |                              | $                     | 11,246    |                            | $
|                                               |                              |                       |           |                            |  
|Net income per common share:                   |                              |                       |           |                            |  
|                                               | Basic                        |                       | $         | 0.30                       |  
|                                               | Diluted                      |                       | $         | 0.30                       |  
|                                               | Dividends                    |                       | $         | 0.14                       |  
|Weighted average number of shares outstanding: |                              |                       |           |                            |  
|                                               | Basic                        |                       |           | 37,432                     |  
|                                               | Diluted                      |                       |           | 37,703                     |  

See notes to Condensed Consolidated Financial Statements.

1

---



Condensed Consolidated Balance Sheets

|                                                                        |                            | July 26,
2001 |         | July 27,
2000 |           | January 25,
2001
|----------------------------------------------------------------------- | -------------------------- | ------------- | ------- | ------------- | --------- | ----------------
|
|
|ASSETS                                                                  |                            |               |         |               |           |                 
|Current Assets:                                                         |                            |               |         |               |           |                 
|Cash and equivalents                                                    |                            | $             | 61,521  |               | $         | 29,496          
|Pharmacy and other receivables, net                                     |                            |               | 101,475 |               |           | 108,936         
|Merchandise inventories                                                 |                            |               | 397,504 |               |           | 410,121         
|Deferred income taxes                                                   |                            |               | 27,911  |               |           | 28,958          
|Other                                                                   |                            |               | 5,107   |               |           | 8,694           
|                                                                        |                            |               |         |               |           |                 
|                                                                        | Total current assets       |               |         | 593,518       |           |                 
|                                                                        |                            |               |         |               |           |                 
|Property:                                                               |                            |               |         |               |           |                 
|Land                                                                    |                            |               | 108,948 |               |           | 109,660         
|Buildings and leasehold improvements                                    |                            |               | 478,832 |               |           | 446,251         
|Equipment and fixtures                                                  |                            |               | 440,525 |               |           | 397,407         
|Beverage licenses                                                       |                            |               | 8,238   |               |           | 8,038           
|                                                                        |                            |               |         |               |           |                 
|                                                                        | Total property at cost     |               |         | 1,036,543     |           |                 
|Less accumulated depreciation                                           |                            |               | 442,868 |               |           | 395,060         
|                                                                        |                            |               |         |               |           |                 
|                                                                        |                            | Property, net |         |               | 593,675   |                 
|                                                                        |                            |               |         |               |           |                 
|Goodwill, net                                                           |                            |               | 125,881 |               |           | 137,725         
|Other assets                                                            |                            |               | 25,804  |               |           | 21,208          
|                                                                        |                            |               |         |               |           |                 
|                                                                        |                            | Total         |         | $             | 1,338,878 |                 
|                                                                        |                            |               |         |               |           |                 
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |                            |               |         |               |           |                 
|Current Liabilities:                                                    |                            |               |         |               |           |                 
|Accounts payable                                                        |                            | $             | 246,441 |               | $         | 222,548         
|Short-term borrowings                                                   |                            |               | 10,000  |               |           |                
|Employee compensation and benefits                                      |                            |               | 79,961  |               |           | 75,267          
|Taxes payable                                                           |                            |               | 45,172  |               |           | 48,014          
|Current portion of long-term debt                                       |                            |               | 3,156   |               |           | 3,064           
|Other                                                                   |                            |               | 30,147  |               |           | 26,692          
|                                                                        |                            |               |         |               |           |                 
|                                                                        | Total current liabilities  |               |         | 414,877       |           |                 
|                                                                        |                            |               |         |               |           |                 
|Long-term debt                                                          |                            |               | 195,368 |               |           | 233,656         
|Deferred income taxes and other long-term liabilities                   |                            |               | 28,263  |               |           | 31,917          
|Commitments and contingencies                                           |                            |               |         |               |           |                 
|Stockholders' Equity:                                                   |                            |               |         |               |           |                 
|Common stock (37,830,000, 37,385,000 and 37,367,000 shares outstanding) |                            |               | 18,915  |               |           | 18,693          
|Additional capital                                                      |                            |               | 148,491 |               |           | 136,133         
|Common stock contribution to Profit Sharing Plan                        |                            |               |        |               |           |                
|Retained earnings                                                       |                            |               | 532,964 |               |           | 515,450         
|                                                                        |                            |               |         |               |           |                 
|                                                                        | Total stockholders' equity |               |         | 700,370       |           |                 
|                                                                        |                            |               |         |               |           |                 
|                                                                        |                            | Total         |         | $             | 1,338,878 |                 
|                                                                        |                            |               |         |               |           |                 

See notes to Condensed Consolidated Financial Statements.

2

---



Statements of Consolidated Cash Flows (unaudited)

|                                                  |                                                                                   | For the Two Quarters Ended                |                                              
|------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------
|
|
|Operating Activities                              |                                                                                   |                                           |                                              
|                                                  | Net income                                                                        |                                           | $                                            
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                           |                                              
|                                                  |                                                                                   |                                           | Depreciation                                 
|                                                  |                                                                                   |                                           | Amortization                                 
|                                                  |                                                                                   |                                           | Deferred income taxes and other              
|                                                  |                                                                                   |                                           | Amortization of restricted stock awards      
|                                                  |                                                                                   |                                           | Common stock contribution to benefit plans   
|                                                  |                                                                                   |                                           | Tax benefits credited to stockholders' equity
|                                                  |                                                                                   |                                           | Changes in assets and liabilities:           
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   | Net cash provided by operating activities |                                              
|                                                  |                                                                                   |                                           |                                              
|Investing Activities:                             |                                                                                   |                                           |                                              
|                                                  | Payments for property additions, store acquisitions and other assets              |                                           |                                              
|                                                  | Receipts from property dispositions                                               |                                           |                                              
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   | Net cash used in investing activities     |                                              
|                                                  |                                                                                   |                                           |                                              
|Financing Activities:                             |                                                                                   |                                           |                                              
|                                                  | Proceeds from (repayments on) long-term borrowings                                |                                           |                                              
|                                                  | Repayments of short-term borrowings                                               |                                           |                                              
|                                                  | Repurchase of common stock from Profit Sharing Plan, net                          |                                           |                                              
|                                                  | Repurchase of common stock                                                        |                                           |                                              
|                                                  | Dividend payments                                                                 |                                           |                                              
|                                                  |                                                                                   |                                           |                                              
|                                                  |                                                                                   | Net cash used in financing activities     |                                              
|                                                  |                                                                                   |                                           |                                              
|Increase in cash and equivalents                  |                                                                                   |                                           | 16,829                                       
|Cash and equivalents at beginning of period       |                                                                                   |                                           | 44,692                                       
|                                                  |                                                                                   |                                           |                                              
|Cash and equivalents at end of period             |                                                                                   | $                                         | 61,521                                       
|                                                  |                                                                                   |                                           |                                              
|Supplemental disclosure of cash flow information: |                                                                                   |                                           |                                              
|                                                  | Income taxes paid                                                                 |                                           | $                                            

See notes to Condensed Consolidated Financial Statements.

3

---



Statements of Condensed Consolidated Stockholders' EquityFor the Year Ended January 25, 2001 and the Two Quarters Ended July 26, 2001

(Thousands)

|                                     |                                         | Common Stock Shares |      | Amount |        | Additional Capital |   | Common Stock Contributions to Profit Sharing Plan |        | Retained Earnings |        | Total Stockholders' Equity |  
|------------------------------------ | --------------------------------------- | ------------------- | ---- | ------ | ------ | ------------------ | - | ------------------------------------------------- | ------ | ----------------- | ------ | -------------------------- | -
|Balance at January 27, 2000          |                                         | 39,385              |      | $      | 19,692 |                    | $ | 135,358                                           |        | $                 | 10,181 |                            | $
|Net income                           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Dividends ($.56 per share)           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Profit Sharing Plan:                 |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|                                     | Issuance of stock for FY00 contribution |                     | 550  |        |        | 275                |   |                                                   | 9,906  |                   |        | (10,181                    | )
|                                     | Stock portion of FY01 contribution      |                     |      |        |        |                    |   |                                                   |        |                   |        | 7,695                      |  
|                                     | Sale of stock to plan                   |                     | 46   |        |        | 23                 |   |                                                   | 1,030  |                   |        |                            |  
|                                     | Purchase of stock from plan             |                     | (298 | )      |        | (149               | ) |                                                   | (5,810 | )                 |        |                            |  
|Restricted stock awards, net         |                                         | 147                 |      |        | 73     |                    |   | 2,394                                             |        |                   |        |                            |  
|Tax expense related to stock awards  |                                         |                     |      |        |        |                    |   | (182                                              | )      |                   |        |                            |  
|Repurchase of common stock           |                                         | (2,463              | )    |        | (1,231 | )                  |   | (5,962                                            | )      |                   |        |                            |  
|Balance at January 25, 2001          |                                         | 37,367              |      | $      | 18,683 |                    | $ | 136,734                                           |        | $                 | 7,695  |                            | $
|Unaudited:                           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Net income                           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Dividends ($.28 per share)           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Profit Sharing Plan:                 |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|                                     | Issuance of stock for FY01 contribution |                     | 287  |        |        | 144                |   |                                                   | 7,551  |                   |        | (7,695                     | )
|Contribution of stock to 401(k) plan |                                         | 120                 |      |        | 60     |                    |   | 3,076                                             |        |                   |        |                            |  
|Restricted stock awards, net         |                                         | 56                  |      |        | 28     |                    |   | 989                                               |        |                   |        |                            |  
|Tax benefit related to stock awards  |                                         |                     |      |        |        |                    |   | 141                                               |        |                   |        |                            |  
|Balance at July 26, 2001             |                                         | 37,830              |      | $      | 18,915 |                    | $ | 148,491                                           |        | $                 |       |                            | $

See notes to Condensed Consolidated Financial Statements.

4

---



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|                             |                         | For The Quarter Ended |     | For the Two Quarters Ended
|---------------------------- | ----------------------- | --------------------- | --- | --------------------------
|
|
|Basic net income per share   |                         | 37,432                |     | $                         
|Effect of dilution from:     |                         |                       |     |                           
|                             | Restricted stock awards |                       | 171 |                           
|                             | Stock options           |                       | 100 |                           
|Diluted net income per share |                         | 37,703                |     | $                         

5

---



|                                    |  | (In millions)
|----------------------------------- |  | -------------
|
|Loss on disposition of fixed assets |  | $            
|Write-off of goodwill               |  |              
|Real estate related expenses        |  |              
|Other closing costs                 |  |              
|Employment related costs            |  |              
|Gain on sale of other assets        |  |              
|                                    |  |              
|Total                               |  | $            
|                                    |  |              



6

---

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

RESULTS OF OPERATIONS

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

Sales

Second quarter fiscal 2002 sales increased 5.1% to $1.042 billion compared to $991 million in the same quarter of the prior year. Total
same-store sales increased 4.7% as compared to the corresponding quarter of fiscal 2001.

Pharmacy
same-store sales increased 11.9% for the quarter, paced by a 9.0% increase in the average retail price per prescription and a 2.9% increase in prescription
volume. Total pharmacy sales increased 12.1% over the same quarter of the prior fiscal year. Pharmacy represented 44.0% of total sales for the quarter, up from 41.3% in the same quarter of the prior
year and up from 41.1% of total sales for the preceding fiscal year. Pharmacy sales as a percent of total sales continue to increase primarily as a result of new branded pharmaceuticals and aggressive
direct-to-consumer advertising by drug manufacturers.

Front-end
sales increased 0.2% for the quarter. Same-store front-end sales decreased 0.4% from the same quarter of last year.

Fiscal
year-to-date sales increased 6.5% to $2.074 billion compared to $1.947 billion in the same period of the prior year. Total
year-to-date same-store sales increased 5.7% over the same period of the prior year, led by same-store pharmacy sales, which increased 13.1%.
Same-store front-end sales increased year-to-date over the same period of the prior year by 0.4%.

Gross Margins

Gross margin dollars (after the charge for LIFO) for the quarter increased 3.4% to $270.1 million from $261.2 million in the same quarter last
year. Gross margin as a percent of sales for the second quarter of fiscal 2002 declined to 25.9% from 26.4% for the same quarter of the prior year. The overall

7

---

margin decline was due primarily to continued increases in lower-margin pharmacy sales. Pharmacy margins for the second quarter of fiscal 2002 declined compared to the same period of the prior year.

Third-party
prescription sales represented 89.4% of overall prescription sales in the second quarter of fiscal 2002 compared to 88.1% in the same quarter of the prior year. We
anticipate this trend to continue as sales to third-party plans continue to increase.

We
use the Last-In First-Out (LIFO) method of inventory valuation. The LIFO provision was $1.4 million for the second quarter of fiscal 2002 compared to
$1.4 million in the same quarter last year. The year-to-date LIFO provision was $3.4 million compared to $5.2 million for the same period last year.

Operating and Administrative Expenses

In second quarter of fiscal 2002, operating and administrative expenses increased as a percent of sales to 23.8% from 23.0% for the same quarter last year,
which included a $3.9 million or 0.4% benefit from a one-time net gain from the settlement of certain legal matters. The additional increase in operating and administrative expenses
as a percent of sales was caused primarily by an increase in depreciation and other expenses related to our e-commerce business and the incremental expenses related to the opening of new
stores. We recently introduced general merchandise offerings on our website. The growth in e-commerce business has been slower than originally forecasted and our operating expenses reflect
the charge for depreciation expense and other expenses which were not incurred in the same period of the prior year.

Year-to-date
operating and administrative expenses for the first half of fiscal 2002 as a percent of sales increased to 23.6% from 23.2% for the same period
prior year.

Provision for Store Closures

We accrue an estimate for the costs associated with closing stores in the period in which the store is identified and approved by management under a plan of
termination which includes the method of disposition and the expected date of completion. These costs include direct costs to terminate a lease or sub-lease a property and the difference
between book value and estimated recovery of fixed assets.

In
January 2001 the board of directors approved a plan to close 15 underperforming stores ("2001 Closure Plan"). We recorded an expense of $25.6 million in fiscal 2001
in association with the 2001 Closure Plan. We closed 14 stores pursuant to the 2001 Closure Plan during the first quarter of fiscal 2002. A summary of the costs associated with the 2001 Closure Plan
incurred to date and revisions to the original estimates are as follows:

|                                    |  | (In millions)
|----------------------------------- |  | -------------
|
|Loss on disposition of fixed assets |  | $            
|Write-off of goodwill               |  |              
|Real estate related expenses        |  |              
|Other closing costs                 |  |              
|Employment related costs            |  |              
|Gain on sale of other assets        |  |              
|                                    |  |              
|Total                               |  | $            
|                                    |  |              

8

---

Additionally,
consistent with prior years, we make decisions to close stores in the normal course of business. During the first quarter of fiscal 2002, we closed one store in addition
to those closed pursuant to the 2001 Closure Plan.

We
have recognized a year-to-date benefit of $1.0 million in fiscal 2002 from a reduction of the provision for store closures not included in the 2001
Closure Plan. This benefit was recognized in the first quarter of fiscal 2002. We recognized a similar benefit in the first quarter of fiscal 2001 of $1.1 million. No benefit or charge was made
to earnings through the provision for store closures in the second quarter of fiscal 2002 or 2001.

Income Before Taxes/Net Income

Income before taxes decreased to $18.6 million from $28.8 million for the same quarter of the prior year. Net income for the same quarter last year included a
one-time net gain of $3.9 million from the settlement of certain legal matters. The balance of the decrease was a result of lower gross margins as a result of the continued growth
of lower margin pharmacy sales, expenses associated with our e-commerce business and incremental expenses related to opening new stores. Net interest expense for the second quarter fiscal
2002 was $3.6 million compared to $4.1 million for the same quarter of the prior year. Interest expense decreased in second quarter of fiscal 2002 compared to second quarter fiscal 2001
primarily from lower borrowing combined with lower interest rates than prior year.

Our
effective tax rate for the second quarter fiscal 2002 was 39.7% down from 40.3% from the same quarter of the prior year. The decrease was primarily a result of the effect of
employment tax credits for fiscal 2002 compared to fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

Cash Position

Cash provided by operating activities for the first half of fiscal 2002 decreased by $7.0 million compared to the first half of fiscal 2001. Cash
provided by operating activities for the first half of fiscal 2001 was primarily from a net increase in accounts payable offset by an increase in pharmacy and other receivables while accounts payable
decreased in the first half of fiscal 2002 offset by a decrease in pharmacy and other receivables. Cash provided by operating activities in the first half of fiscal 2002 was from an increase in
deferred income taxes and other current assets. The change in deferred income taxes and other current assets adversely impacted cash from operations during the first half of fiscal
2001. Cash provided by operating activities for the first half of fiscal 2002 compared to the first half of fiscal 2001 was not significantly affected by net income, after adding back
non-cash depreciation, amortization and stock contribution to retirement plans.

Cash
used in investing activities for the first half of fiscal 2002 decreased by $24.3 million, primarily due to decreases in capital expenditures. The first half of fiscal
2001 included capital expenditures for renovations of stores acquired in the third quarter of fiscal 2000, enhanced store technology and e-commerce costs.

During
the second quarter of fiscal 2002, we opened six new stores and relocated one. We intend to open between 14 and 16 new stores in the second half of fiscal year 2002, bringing
the total number of new stores to be opened in fiscal 2002 to between 25 and 27. Net capital expenditures for the first half of fiscal 2002 were $48.4 million. We estimate our capital
expenditures for fiscal 2002 to be approximately $100 million, supporting the increase in new stores and continued investment in technology.

We
have available an unsecured and uncommitted $10.0 million line of credit which expires on September 21, 2001. At the end of the second quarter of fiscal 2002,
$10.0 million was outstanding under this facility.

9

---

We have an unsecured committed revolving line of credit of $130.0 million, which expires on October 14, 2004, and accrues interest at LIBOR-based rates. At the end of
the second quarter fiscal 2002, $75.0 million was outstanding under this line of credit with a weighted average interest rate of 5.66%. The amount outstanding has been included in
long-term debt, as we do not plan to pay down this line of credit over the next 12-month period.

Additionally,
we have other long-term debt associated with our equity investment in RxAmerica, private placement financings and other equipment financing agreements which
amounted to approximately $120.4 million at the end of second quarter fiscal 2002 and mature at various dates from 2004 to 2017 at interest rates ranging from 5.85% to 7.85%.

On
August 27, 2001, we completed a private placement financing in which $50.0 million in senior notes were issued. The notes consist of $20.0 million of fully
amortized notes through 2008 bearing interest at a rate of 6.46% and $30.0 million of interest-only notes bearing interest at a rate of 6.71% with the principal due in full in 2008.
Proceeds from the borrowing were used to pay down the outstanding balance on the revolving credit line and to provide additional cash for operations.

Our
unsecured committed revolving line of credit contains various quarterly financial covenants that limit maximum debt to capitalization and minimum fixed charge coverage ratios. The
agreement was amended on January 25, 2001 to exclude a $25.6 million charge recorded in the fourth quarter of fiscal 2001 from the computation of the fixed charge. As of July 26,
2001, we were in compliance with restrictions and limitations included in these provisions.

Our
board of directors authorized the repurchase of up to 2,000,000 shares of our common stock in November 1999. The authorization provided for a maximum expenditure of
$80.0 million and expires in November 2004. We have purchased 1,146,868 shares to date under this authorization at a total cost of $22.5 million. No repurchases were made during
the first half of fiscal 2002. Stock repurchases are made at the discretion of our board of directors and are dependent upon the market price of our common stock and available cash.

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

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful
lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Also during fiscal 2003, we will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets, to the extent applicable. We have not yet determined what the effect of these statements will be on our results of
operations and financial position.

Factors Affecting Our Future Prospects

You should carefully read the following factors affecting our future prospects.

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

We face intense competition with local, regional and national companies, including other drug store chains, independent drug stores, on-line
retailers, supermarket chains and mass merchandisers.

10

---

We may not be able to compete effectively against them. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, which would
require us to increase our sales volume and to sell higher-margin products and services at reduced prices to remain competitive. We cannot assure you that we will be able to continue to compete
effectively in our markets or increase our sales volume or margins in response to further increased competition.

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

We are reimbursed by third-party payors for approximately 89% of all the prescription drugs that we sell. These third-party payors could reduce the levels at
which they will reimburse us for the prescription drugs that we provide to their members. Furthermore, if Medicare is reformed to include prescription benefits, Medicare may cover some of the
prescription drugs that we now sell at retail prices, and we may be reimbursed at prices lower than our current retail prices. If third-party payors reduce their reimbursement levels, or if Medicare
covers prescription drugs at reimbursement levels lower than our current retail prices, our margins on these sales would be reduced and the profitability of our business could be adversely affected.

We are substantially dependent on a single supplier of pharmaceutical products and our other suppliers to sell products to us on satisfactory terms.

We obtain approximately 95% of our pharmaceutical supplies from a single supplier, Bergen Brunswig, pursuant to a long-term supply contract.
Pharmacy sales represented approximately 44% of our total sales during the first half of fiscal 2002, and therefore our relationship with Bergen is significant to us. Any significant disruptions in
our relationships with our major suppliers, particularly our relationship with Bergen, could have a material adverse effect on us.

In
August 2001 Bergen Brunswig and AmeriSource completed their merger. Although we do not expect the merger to enhance the risk described above, the impact is not known to us
at this time.

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

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

Certain risks are inherent in the provision of pharmacy services, and our insurance may not be adequate to cover all claims against us.

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

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

The economy has shown signs of slowing since the beginning of our fiscal year. If the economy continues to slow and unemployment increases or inflationary
conditions worry consumers, they may

11

---

decrease their purchases, particularly of products other than pharmaceutical products that they need for health reasons. We make a higher profit on our sales of front-end products than we
do on sales of pharmaceutical products. Therefore, any decrease in our sales of front-end products will decrease our profitability.

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

There is currently a shortage of licensed pharmacists in some of the markets where we operate. Our inability to attract and retain pharmacists and other key
personnel could adversely affect us.

In
response to the pharmacist shortage we recently entered into a joint venture agreement with Bergen Brunswig to operate prescription fill centers. We opened our first such fill
center during the second quarter of fiscal 2002 and have begun to fill orders for approximately 170 stores at the end of the second quarter. The center has the capacity to fill more than 10,000
prescriptions per shift. The success of this fill center and possible other locations is important to our ability to meet the shortage of pharmacists.

The energy crisis may result in increases in operating and administrative expenses in fiscal 2002.

We currently operate 351 stores in the state of California, which has experienced an energy crisis causing some power outages. California utility companies
have announced significant increases in energy rates, which began being reflected in billings received in the second quarter of fiscal 2002. These shortages may expand to other markets in which we
operate. We have taken such steps as reducing store lighting, raising store temperatures and disconnecting unused electrical equipment to conserve energy, but the volatility of energy rates may result
in increases which would cause an increase in our operating and administrative expenses.

Changes in the supply chain, including the transition from third-party warehouse distribution to self-distribution, could result in increased costs.

We are reevaluating our entire supply chain, which we believe puts us at a competitive disadvantage with our competitors in our cost of merchandise. These
changes could result in significant investment in systems.

We
terminated our agreement with our third-party warehouse operator in Northern and Southern California during the second quarter of fiscal 2002. We incurred additional costs during
the second quarter in transitioning the operation of the warehouses, which affected net income in the second quarter. Transition costs could continue to adversely affect net income in the near future.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

Market Risk

We do not undertake any specific actions to cover exposure to interest rate risk and we are not a party to any interest rate risk management transactions.

We
have not purchased and do not hold any derivative financial instruments.

A
57 basis point move in interest rates (10% of our floating financial instruments) would have an immaterial effect on our pretax income and cash flow over the next year. The 57 basis
point move in interest rates would also have an immaterial effect on the fair value of our fixed rate financial instruments.

12

---



PART IIOTHER INFORMATION

Item 4. Submission Of Matters To A Vote Of Security Holders



Votes in favor

Votes withheldR.M. Long

27,236,654

7,347,673R.A. Plomgren

27,233,174

7,351,153H.R. Somerset

27,251,933

7,332,394F.E. Trotter

27,232,118

7,352,209


There
were no abstentions and no broker non-votes.

Other
directors whose term of office as a director continued after the Annual Meeting are:

R.M. Brooks

G.H. SaitoW.L. Chenevich

D.L. SorbyW.G. Combs

T.R. SweeneyM.S. Metz

A.G. WagnerS.D. Roath




Ratification
of Deloitte & Touche as independent auditors for the Fiscal Year Ending January 31, 2002. The vote was as follows:

Votes in favor

32,969,342Votes withheld

759,816Votes abstaining

865,169


Item 6. Exhibits and Reports on Form 8-K



13

---





SIGNATURES

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

|                        |  | LONGS DRUG STORES CORPORATION(Registrant)
|----------------------- |  | -----------------------------------------
|Date: September 7, 2001 |  | By:                                      
|Date: September 7, 2001 |  | By:                                      

14

---

QuickLinks