**Exhibit 10.1**

 

**LONGS DRUG STORES CORPORATION2003 EXECUTIVE INCENTIVE PLAN(As Adopted February 25, 2003)**

 

**1.****    ****Purpose**

 

Thepurpose of this Plan is to motivate and reward eligible employees for goodperformance by making a portion of their cash compensation dependent on theachievement of certain Performance Goals related to the performance of LongsDrug Stores Corporation (the “Company”) and its operating units. This Plan isdesigned to ensure that the incentives paid hereunder to executive officers ofthe Company are deductible under Section 162(m) of the Internal RevenueCode of 1986, as amended, and the regulations and interpretations promulgatedthereunder (the “Code”). Accordingly, the adoption of this Plan as to “coveredemployees” under Code Section 162(m) is subject to the approval of theCompany’s stockholders pursuant to Code Section 162(m).

 

**2.****    ****Definitions**

 

Thefollowing definitions shall be applicable throughout the Plan:

 

(a)  “Award”means the amount of bonus payable under the Plan to a Participant with respectto a Performance Period.

 

(b)  “Board”means the Board of Directors of the Company.

 

(c)  “Committee”means the Compensation Committee of the Board or another Committee designatedby the Board which is comprised of two or more “outside directors” as definedin Code Section 162(m).

 

(d)  “Participant”means any officer or key employee of the Company who is designated as aParticipant by the Committee.

 

(e)  “PerformanceGoals” means one or more objective measurable performance factors as determinedby the Committee with respect to each Performance Period based upon one or morefactors, including, but not limited to: operating income before provisions forLIFO accounting, taxes, contributions to the Company’s profit sharing plan, andexecutive bonuses; cash flow return on investment; sales revenue; operatingcash flow; pre-tax earnings; earnings; profit; earnings before taxes; earningsbefore interest, depreciation, taxes and amortization; working capital; returnon equity; net income; operating income; revenue; earnings per share, economicvalue added (“EVA”), stock price, price/earnings; return on assets (or totalassets) return on earning assets; operating expenses; selling, general andadministrative expenses; inventory (or inventory turnover); debt; profit margin(net income/sales); accounts receivable (or accounts receivable turnover,collection periods); writeoffs; cash; cost of goods sold; liquidity (currentassets/current liabilities); and debt to equity. Bonuses paid to Participantswho are not subject to the limitations of Code Section 162(m) may takeinto account other factors.

 

(f)  “PerformancePeriod” means any period not exceeding 36 months as determined by theCommittee, in its sole discretion. The Committee may establish differentPerformance Periods for different Participants, and the Committee may establishconcurrent or overlapping Performance Periods.

 

(g)  “Plan”means this Longs Drug Stores Corporation 2003 Executive Incentive Plan, asamended from time to time.

 

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**3.****    ****Administration**

 

ThePlan shall be administered by the Committee, which shall have the discretionaryauthority to interpret the provisions of the Plan, including all decisions oneligibility to participate, the establishment of payment targets and the amountof the Awards payable under the Plan. The decisions of the Committee shall befinal and binding on all parties making claims under the Plan.

 

**4.****    ****Eligibility**

 

Officersand key employees of the Company shall be eligible to participate in the Planas determined at the sole discretion of the Committee.

 

**5.****    ****Amount of Bonus**

 

Withrespect to each Participant, the Committee will establish one or morePerformance Periods, an individual Participant incentive target for eachPerformance Period and the Performance Goal or Goals to be met during suchPerformance Periods (increased or decreased, in each case in accordance withfactors adopted by the Committee with respect to the Performance Period thatrelate to unusual or extraordinary items). The selection and adjustment ofapplicable Performance Goals and targets shall occur in compliance with therules of Code Section 162(m). The maximum amount of any Awards that can bepaid under the Plan to any Participant during any Performance Period is theannualized amount of 300% of the highest rate of base salary paid to anyexecutive of the Company with respect to the fiscal year ending in 2003 asreported in the Company’s proxy statement for the 2003 annual meeting. TheCommittee reserves the right, in its sole discretion, to reduce or eliminatethe amount of an Award otherwise payable to a Participant with respect to anyPerformance Period in its sole discretion.

 

**6.****    ****Payment of Bonus**

 

(a)  Unlessotherwise determined by the Committee, a Participant must be on the Company’spayroll on the date the bonus is to be paid. The Committee may make exceptionsto this requirement in the case of retirement, death or disability or underother circumstances, as determined by the Committee in its sole discretion.

 

(b)  Bonuspayments may be made (i) in cash, (ii) in shares of Company stockgranted under the Company’s 1995 Long-Term Incentive Plan, as replaced,modified, amended or supplemented from time to time (the “1995 Stock Plan”) orunder the Company’s Non-Executive Long-Term Incentive Plan, as replaced,modified, amended or supplemented from time to time (the “Non-Executive Plan”),and/or (iii) in options to purchase Company stock granted under theCompany’s 1995 Stock Plan or the Non-Executive Plan, as determined by theCommittee in its sole discretion. The number of shares granted shall bedetermined by dividing the cash amount forgone by the Fair Market Value (asdefined under the 1995 Stock Plan or the Non-Executive Plan) of a share on thedate in question. Options granted pursuant to this Section 6 shall have afair value equal to the amount of cash forgone, which fair value shall be basedon the Black-Scholes or other objective method determined by the Committee, inits sole discretion.

 

(c)  Anydistribution made under this Plan shall occur within a reasonable period oftime after the end of the Performance Period in which the Participant hasearned the Award; provided, that no Award shall become payable to a Participantwith respect to any Performance Period until the Committee has certified inwriting that the terms and conditions underlying the payment of suchAward have been satisfied. The Committee, inits sole discretion, may permit a Participant to defer receipt of cash thatwould otherwise be delivered to the Participant under this Plan. Any suchdeferral elections shall be subject to such rules and procedures as determinedby the Committee in its sole discretion.

 

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(d)  Ifa Participant entitled to the payment of an Award under the Plan dies prior tothe distribution of such Award, the distribution shall be made to theParticipant’s beneficiary, as designated under the Plan, within the same timeperiod in which the Award otherwise would have been paid to the Participant.

 

**7.****    ****General**

 

(a)  REGISTRATIONOF STOCK. The Company shall be under no obligation to register under theSecurities Act of 1933, as amended (the “Act”), any of the shares of Companycommon stock distributed under the Plan, if any. If the shares of Company commonstock distributed under the Plan, if any, are in certain circumstances exemptfrom registration under the Act, the Company may restrict the transfer of suchshares in such manner as it deems advisable to ensure the availability of anysuch exemption.

 

(b)  TAXWITHHOLDING. The Company shall have the right to deduct from all Awards paid incash any federal, state or local income and/or payroll taxes required by law tobe withheld with respect to such payments. In the case of Awards settled inCompany common stock, the person receiving such common stock may be required topay to the Company the amount of any such taxes which the Company is requiredto withhold with respect to such common stock or, at the Committee’s solediscretion, the Company may withhold a number of shares of Company common stockwhich have a fair market value equal to the amount of such withholdings. TheCompany also may withhold from any other amount payable by the Company or anyaffiliate to the Participant an amount equal to the taxes required to bewithheld from any Award.

 

(c)  CLAIMTO AWARDS AND EMPLOYMENT RIGHTS. Nothing in the Plan shall confer on anyParticipant the right to continued employment with the Company or any of itsaffiliates, or affect in any way the right of the Company or any affiliate toterminate the Participant’s employment at any time, and for any reason, orchange the participant’s responsibilities. Awards represent unfunded andunsecured obligations of the Company and a holder of any right hereunder inrespect of any Award shall have no rights other than those of a generalunsecured creditor to the Company.

 

(d)  BENEFICIARIES.To the extent the Committee permits beneficiary designations, any payment ofAwards due under this Plan to a deceased Participant shall be paid to thebeneficiary duly designated by the Participant in accordance with the Company’spractices. If no such beneficiary has been designated or survives theParticipant, payment shall be made to the Participant’s legal representative. Abeneficiary designation may be changed or revoked by a Participant at any time,provided the change or revocation is filed with the Committee prior to theParticipant’s death.

 

(e)  NONTRANSFERABILITY.A person’s rights and interests under the Plan, including any Award previouslymade to such person or any amounts payable under the Plan, may not be assigned,pledged, or transferred except, in the event of a Participant’s death, to adesignated beneficiary as provided in the Plan, or in the absence of suchdesignation, by will or the laws of descent and distribution.

 

(f)  INDEMNIFICATION.Each person who is or shall have been a member of the Committee and eachemployee of the Company or an affiliate who is delegated a duty under the Planshall be indemnified and held harmless by the Company from and against anyloss, cost, liability or expense that may be imposed upon or reasonablyincurred by him in connection with or resulting from any claim, action, suit orproceeding to which he may be a party or in which he may be involved by reasonof any action or failure to act under the Plan and against and from any and allamounts paid by him in satisfaction of judgment in any such action, suit orproceeding against him, provided such loss, cost, liability or expense is notattributable to such person’s willful misconduct. Any person seekingindemnification under this provisions shall give the Company prompt notice ofany claim and shall give the Company an opportunity, at its own expense, tohandle and defend the same before the person undertakes to handle and defend iton his own behalf. The foregoing right of indemnification shall not beexclusive of any other rights of indemnification to which such persons may beentitled under the Company’s Articles of Incorporation or By-Laws, as a matterof law, or otherwise, or any power that the Company may have to indemnify themor hold them harmless.

 

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(g)  EXPENSES.The expenses of administering the Plan shall be borne by the Company.

 

(h)  PRONOUNS.Masculine pronouns and other words of masculine gender shall refer to both menand women.

 

(i)  TITLESAND HEADINGS. The titles and headings of the sections in the Plan are forconvenience of reference only, and in the event of any conflict, the text ofthe Plan, rather than such titles or headings, shall control.

 

(j)  INTENT.The intention of the Company and the Committee is to administer the Plan incompliance with Code Section 162(m) so that the Awards paid under the Planto Participants who are or may become subject to Code Section 162(m) willbe treated as performance-based compensation under CodeSection 162(m)(4)(C). If any provision of the Plan does not comply withthe requirements of Code Section 162(m), then such provision shall be construedor deemed amended to the extent necessary to conform to such requirements.

 

(k)  GOVERNINGLAW. The validity, construction, and effect of the Plan, any rules andregulations relating to the Plan, and any Award shall be determined inaccordance with the laws of the State of California (without giving effect toprinciples of conflicts of laws thereof) and applicable Federal law.

 

(l)  AMENDMENTSAND TERMINATION. The Board may terminate the Plan at any time, provided suchtermination shall not affect the payment of any Awards accrued under the Planprior to the date of the termination. The Board may, at any time, or from timeto time, amend or suspend and, if suspended, reinstate, the Plan in whole or inpart, provided however, that any amendment of the Plan shall be subject to theapproval of the Company’s shareholders to the extent required to comply withthe requirements of Code Section 162(m), or any other applicable laws,regulations or rules.

 

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