SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 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 QUARTER ENDED MAY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______
Commission File Number
1-604
WALGREEN CO.
(Exact name of registrant as specified in its charter)
Illinois 36-1924025
(State of incorporation) (I.R.S. Employer Identification No.)
200 Wilmot Road, Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)
(847) 940-2500
(Registrant's telephone number, including area code)
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 number of shares issued and outstanding of the registrant's
Common Stock, $.15625 par value, as of June 30, 1998 was
497,456,963.
Page 1 of 11
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements included
herein have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission. The
Consolidated Condensed Balance Sheet as of May 31, 1998 and the
Consolidated Condensed Statements of Earnings for the three and
nine months ended May 31, 1998 and 1997, have been prepared without
audit. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the
company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
consolidated condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the
company's latest annual report on Form 10-K.
In the opinion of the company the condensed statements for the
unaudited interim periods presented include all adjustments,
consisting only of normal recurring adjustments, necessary to
present a fair statement of the results for such interim periods.
Because of the influence of certain holidays, seasonal and other
factors on the company's operations, net earnings for any interim
period may not be comparable to the same interim period in previous
years, nor necessarily indicative of earnings for the full year.
2
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
May 31, August 31,
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 111 $ 73
Accounts receivable 388 376
Inventories 1,838 1,733
Other current assets 83 144
Total Current Assets 2,420 2,326
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $872 at May 31 and $748 at August 31 2,027 1,754
Other Non-Current Assets 133 127
TOTAL ASSETS $ 4,580 $ 4,207
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 795 $ 813
Other current liabilities 644 626
Total Current Liabilities 1,439 1,439
Non-Current Liabilities:
Deferred income taxes 101 113
Other non-current liabilities 338 282
Total Non-Current Liabilities 439 395
Shareholders' Equity:
Preferred stock $.125 par value; authorized
16 million shares; none issued - -
Common stock $.15625 par value; authorized
1.6 billion shares; issued and outstanding
497,147,456 at May 31 and
493,789,966 at August 31 78 77
Paid-in capital 93 30
Retained Earnings 2,531 2,266
Total Shareholders' Equity 2,702 2,373
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $4,580 $4,207
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
3
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(In Millions Except Per Share Data)
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1997 1998 1997
Net sales $ 3,887 $ 3,403 $ 11,466 $ 10,060
Costs and Deductions:
Cost of sales 2,840 2,470 8,342 7,291
Selling, occupancy and
administration 843 758 2,498 2,232
3,683 3,228 10,840 9,523
Other (Income)Expense:
Interest income (2) (2) (3) (4)
Interest expense - 1 1 2
(2) (1) (2) (2)
Earnings before income tax provision
and cumulative effect of
accounting change 206 176 628 539
Income tax provision 79 68 243 209
Earnings before cumulative effect
of accounting change 127 108 385 330
Cumulative effect of accounting change
for system development costs - - (26) -
Net earnings $ 127 $ 108 $ 359 $ 330
Per Share-
Basic:
Earnings before cumulative effect
of accounting change $ 0.26 $ 0.22 $ 0.78 $ 0.67
Cumulative effect of accounting
change for system development
costs - - (0.05) -
Net earnings $ 0.26 $ 0.22 $ 0.73 $ 0.67
Diluted:
Earnings before cumulative effect
of accounting change $ 0.25 $ 0.21 $ 0.77 $ 0.66
Cumulative effect of accounting
change for system development
costs - - (0.05) -
Net earnings $ 0.25 $ 0.21 $ 0.72 $ 0.66
Dividends declared $ 0.0625 $ 0.0600 $ 0.1875 $ 0.1800
Average shares outstanding 497 492 496 492
Dilutive effect of stock options 7 6 6 6
Average shares outstanding
assuming dilution 504 498 502 498
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
4
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Millions)
Nine Months Ended
May 31,
1998 1997
Net cash provided by operating activities $ 425 $ 505
Cash Flows from Investing Activities:
Additions to property and equipment (462) (289)
Proceeds from the surrender of corporate-
owned life insurance policies 58 -
Other 13 (7)
Net cash used for investing activities (391) (296)
Cash Flows from Financing Activities:
Cash dividends paid (92) (86)
Proceeds from employee stock plans 81 6
Other 15 (1)
Net cash provided by (used for) financing
activities 4 (81)
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents 38 128
Cash and cash equivalents at beginning of year 73 9
Cash and Cash Equivalents at end of period $ 111 $ 137
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
5
WALGREEN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Inventories are valued on a lower of last-in, first-out
(LIFO) cost or market basis. At May 31, 1998 and August 31, 1997,
inventories would have been greater by $476 million and $444
million respectively, if they had been valued on a lower of first-
in, first-out (FIFO) cost or market basis. LIFO inventory costs
can only be determined annually when inflation rates and inventory
levels are finalized; therefore, LIFO inventory costs for interim
financial statements are estimated. Cost of sales is primarily
computed on an estimated basis and adjusted based on periodic
inventories.
(2) Financial Accounting Board Statement No. 128 "Earnings Per
Share" was adopted by the company in the quarter ended February 28,
1998. "Basic earnings per share" and "diluted earnings per share,"
as defined by the bulletin, replaced "primary earnings per share"
and "fully diluted earnings per share." Earnings per share have
been restated for prior periods.
All share data have been adjusted to reflect a two-for-one
stock split distributed to shareholders August 8, 1997. In
addition the Board of Directors approved increases in the
authorized common stock, from 800 million shares to 1.6 billion
shares, and in the authorized preferred stock, from 8 million
shares to 16 million shares.
(3) In accordance with the EITF (Emerging Issues Task Force)
consensus reached on November 20, 1997, the company was required to
change its accounting for business process reengineering costs.
EITF 97-13 "Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project that Combines Business
Process Reengineering and Information Technology Transformation,"
requires that the cost of business process reengineering activities
that are part of a project to acquire, develop or implement
internal use software, whether done internally or by third parties,
be expensed as incurred. Previously, the company capitalized these
costs as systems development costs.
The change, effective as of September 1, 1997, resulted in a
cumulative pretax charge of $43 million, or $.05 per share,
recorded in the quarter ended November 30, 1997. No restatement of
prior year financial statements was required. Except for the
cumulative effect of the accounting change, the effect of this
change on the current year and prior year quarters is not material.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net earnings for the third quarter, ended May 31, 1998, were $127
million or $.25 per share on a diluted basis. This was a 17.6%
increase over last year. Earnings before accounting change for the
nine months were up 16.7% to $385 million or $.77 per share. The
accounting change involved expensing the cumulative cost of
business process reengineering activities that had been capitalized
as part of system development projects. After this $26 million
after-tax charge ($.05 per share), net earnings were $359 million
or $.72 per share.
Sales increased by 14.2% in the third quarter, to $3.9 billion, and
rose by 14.0% to $11.5 billion for the first nine months.
Drugstore sales increases resulted from sales gains in existing
stores and added sales from new stores, each of which include an
indeterminate amount of market-driven price changes. Comparable
drugstore (those open at least one year) sales were up 8.9% and
8.8% for the quarter and first nine months. New store openings
accounted for 8.9% and 8.6% of the quarterly and nine-month sales
increase. The company operated 2,470 drugstores as of May 31,
1998, compared to 2,289 a year earlier.
Prescription sales increased 20.4% for the third quarter and 19.6%
for the first nine months. Prescription sales in comparable stores
increased 15.2% for the quarter and 14.6% for the nine-month
period. Pharmacy sales trends are expected to continue primarily
because of expansion into new markets, increased penetration in
existing markets and demographic changes such as the aging
population.
Gross margins as a percent of sales decreased in the quarter to
26.9% of sales from 27.4% last year and to 27.2% from 27.5% for the
nine-month period. The two major factors contributing to the
decrease were the decline in pharmacy gross profit margins and the
interim LIFO provision.
Third party retail and mail order sales, which have lower gross
margin rates compared to the rest of the store, continue to become
a larger portion of pharmacy sales. The margins are under
continued pressure from the reimbursement rates demanded by
managed care organizations. The company is responding to these
gross margin pressures by evaluating contracts with the
organizations on a case by case basis to insure a reasonable return
to shareholders. This may result in sacrificing sales volume to
insure that minimum gross margin standards are met. Improved gross
margins in the rest of the store helped offset the decline.
The company uses the LIFO method of inventory valuation, which can
only be determined annually when inflation rates and inventory
levels are finalized; therefore, LIFO inventory costs for interim
financial statements are estimated. Cost of sales includes a LIFO
provision of $16 million and $32 million for the quarter and nine-
month periods ended May 31, 1998 versus $4 million and $19 million
for the same periods a year ago.
Selling, occupancy and administration expenses decreased to 21.7%
from 22.3% of sales in the quarter and to 21.8% from 22.2% of sales
for the nine months. Lower payroll, advertising, store closing
costs and other headquarters expenses, as a percent to sales, were
the principal reasons for the decline in the quarter and nine
months. The growth in mail order pharmacy, which has a lower
expense ratio, also contributed to the decrease.
The effective tax rates were 38.75% for the quarters and nine-month
periods.
7
FINANCIAL CONDITION
Cash and cash equivalents were $111 million at May 31, 1998,
compared to $137 million at May 31, 1997. Short-term investment
objectives are to maximize yields, while minimizing risk and
maintaining liquidity. To attain these objectives, investment
limits are placed on the amount, type and issuer of securities.
Net cash provided by operating activities for the first nine months
of fiscal 1998 was $425 million compared to $505 million a year
ago. The company's profitability is the principal source for
providing funds for expansion and remodeling programs, dividends to
shareholders and funding for various technological improvements.
Net cash used for investing activities was $391 million versus $296
million last year. Additions to property and equipment were $462
million compared to $289 million last year. There were 181 new or
relocated drugstores opened during the first nine months of this
year compared to 151 for the same period last year. There were 100
owned locations opened during the first nine months of the year or
under construction at May 31, 1998 versus 67 for the same period
last year. Capital expenditures are expected to exceed $600
million and the company expects to exceed its goal of 280 new
stores in fiscal 1998. During the nine-month period the company
surrendered corporate-owned life insurance policies resulting in
net proceeds of $58 million.
Net cash provided by financing activities was $4 million compared
to $81 million used a year ago. In the fourth quarter of fiscal
1997, the company began issuing shares of authorized but previously
unissued shares to satisfy various stock option and purchase plan
requirements. In fiscal 1998 3.4 million shares were issued. This
avoided purchasing shares on the open market which would have
resulted in cash outflows of approximately $76 million. At May 31,
1998, the company had $222 million in unused bank lines of credit
and $100 million of unissued authorized debt securities, previously
filed with the Securities and Exchange Commission.
The company has been addressing computer software modifications or
replacements to enable transactions to process properly in the year
2000. Based on currently available information, all necessary
changes are expected to occur in a timely manner. The cost of
these changes is expected to be approximately $10 million which is
based on management's best estimates and may be changed as
additional information becomes available. Although the company is
working with suppliers and customers regarding this issue, no
assurance can be given with respect to any potential adverse
effects on the company of any failure by other parties to achieve
year 2000 compliance.
In June 1998 the company completed the sale of its long-term care
pharmacy business. Annualized revenues from this operation were
approximately $40 million. The gain on the sale will be recorded
in the fourth quarter.
In March 1998 Statement of Position 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" was
issued. This pronouncement, which is effective by the company's
fiscal year 2000, provides guidance on the capitalization of costs
related to internal use software. The pronouncement is not
expected to materially impact the company's consolidated financial
position or results of operations.
In April 1998 Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" was issued. This standard requires that costs
related to start-up activities be expensed as incurred. The
company's policies are in compliance with this standard, and
therefore, no adjustments are necessary.
8
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-Q, as well as in other public
filings, press releases and oral statements made by our
representatives, is forward-looking information based on current
expectations and plans that involve risks and uncertainties.
Forward-looking information includes statements concerning pharmacy
sales trends, prescription margins, number of new store openings,
the level of capital expenditures and the company's success in
addressing Year 2000 issues; as well as those that include or are
preceded by the words "expects,""estimates,""believes" or similar
language. For such statements, we claim the protection of the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995. The following factors, in addition to those discussed
elsewhere in this Form 10-Q and in our Annual Report on Form 10-K
for the fiscal year ended August 31, 1997, could cause results to
differ materially from management expectations as projected in such
forward-looking statements: changes in economic conditions
generally or in the markets served by the company; consumer
preferences and spending patterns; competition from other drugstore
chains, supermarkets, other retailers and mail order companies;
changes in state or federal legislation or regulations; the efforts
of third party payors to reduce prescription drug costs; the
success of planned advertising and merchandising strategies; the
availability and cost of real estate and construction; accounting
policies and practices; the company's ability to hire and retain
pharmacists and other store and management personnel; the company's
relationships with its suppliers; the ability of the company, its
vendors and others to manage Year 2000 issues; the company's
ability to successfully implement new computer systems and
technology; and adverse determinations with respect to litigation
or other claims. The company assumes no obligation to update its
forward-looking statements to reflect subsequent events or
circumstances.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report:
10.(a) Agreement Dated February 3, 1998, between
Walgreen Co. and Charles R. Walgreen III.
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
which ended May 31, 1998.
10
SIGNATURES
Pursuant to the requirements 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.
WALGREEN CO.
(Registrant)
Dated July 8, 1998 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated July 8, 1998 /s/W.M. Rudolphsen
W.M. Rudolphsen
Controller
(Chief Accounting Officer)
11
INDEX TO EXHIBITS
DOCUMENTS FILED WITH THIS REPORT
Exhibit 10(a) Agreement Dated February 3, 1998, between Walgreen
Co. and Charles R. Walgreen III
Exhibit 27 Financial Data Schedule
THIS AGREEMENT, dated this 3 day of February, 1998, by and
between WALGREEN CO., an Illinois corporation (the "Company"), and
Charles R. Walgreen III of Lake Forest, Illinois (the "Employee").
WITNESSETH:
WHEREAS, the Employee has been continuously in the employ of
the Company since 1952 and is presently serving as Chairman of the
Board of the Company; and
WHEREAS, the Company desires that, if the Employee remains in
its employ until his retirement date, the Employee shall during the
ensuing three years be available to the Company for advice and
counsel as reasonably requested; and
WHEREAS, upon the terms and conditions hereinafter set forth,
the Employee is willing to enter into this Agreement:
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements of the parties herein contained, it
is hereby agreed as follows:
1. The term "retirement date", as used in this Agreement,
means the "pay through" date as shall be designated on Walgreen
payroll records.
2. Until his retirement date, provided the Employee
continues in the employ of the Company, the Employee shall devote
substantially his entire business time and attention to the
business and affairs of the Company and its subsidiaries and shall
perform such duties as reasonably may be assigned by the Board of
Directors.
3. The Employee agrees that, for a period of three (3) years
from and after his retirement date, he will be available at
reasonable times upon reasonable notice by the Company for
consultation with personnel of the Company and for special services
to the Company and its subsidiaries such as surveys and the
formulation and development of special programs pertaining to
activities of the Company. As compensation for such services, the
Company agrees to pay to the Employee, in equal monthly
installments a sum equal in the aggregate to 150% of the annual
base salary rate received by the Employee in the last year prior to
his retirement date. Such compensation shall be in addition to any
benefits to which the Employee may be entitled under any pension,
profit sharing, option or other plan of the Company. It is further
understood that perquisites provided to Employee such as his
Company car, payment of his country club dues and secretarial
support are not affected by this Agreement.
4. The Employee agrees that, during the period of this
agreement, he will not directly or indirectly, whether as
principal, agent, partner, officer, director, employee, stockholder
of in excess of 1/2 of 1% of the outstanding stock, or member,
engage in any business or activity which, in the opinion of the
Board of Directors of the Company, shall be competitive with or
adverse to the interests of any business conducted by the Company
or any of its subsidiaries, except with the prior written consent
of the Board of Directors of the Company.
5. This agreement and, except as hereinafter provided all
obligations of the Company hereunder, shall terminate if prior to
the Employee's retirement date, he shall voluntarily leave the
employ of the Company or shall be discharged from his employment,
or shall assign any of his rights hereunder, or if after the
Employee's retirement date, he shall breach his agreement contained
in Section 4 hereof.
If before or after retirement the Employee should by reason of
physical disability be unable to perform his duties, the Company
shall be obligated to commence, or complete, as may be applicable,
the payments specified in Section 3 hereof.
If before or after retirement the Employee should die, the
Company shall thereafter be obligated to commence, or complete, as
may be applicable, payments to the beneficiary of the Employee,
hereinafter named, in sums equal to one-half of the amounts which
the Employee would have received, if living, as specified in
Section 3 hereof.
6. This agreement shall be binding upon the parties hereto
and the corporate successors and assigns of the Company.
IN WITNESS WHEREOF, the parties have duly executed this
agreement the day and year first above written.
WALGREEN CO.
By John A. Rubino C. R. Walgreen III
Vice President Charles R. Walgreen
III
Attest:
Julian A. Oettinger
Secretary
The undersigned Charles R. Walgreen III, as the Employee in
the attached Agreement, hereby designates Charles D. Hunter, Nancy
Godfrey, Julian A. Oettinger, Trustees u/a dated February 8, 1973,
with Charles R. Walgreen III as his beneficiary under the
provisions of Paragraph 5 thereof. The undersigned further
reserves the right to change beneficiaries or successor
beneficiaries from time to time during the term of the Agreement.
Dated this 3 day of February, 1998.
C. R. Walgreen III
</TEXT
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MAY 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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