SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 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)
Registrant's telephone number, including area code: (847) 940-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
New York Stock Exchange
Common Stock ($.15625 Par Value) Chicago Stock Exchange
New York Stock Exchange
Preferred Share Purchase Rights Chicago Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of October 30, 1998, there were 498,710,881 shares of Walgreen Co.
common stock, par value $.15625 per share, issued and outstanding and the
aggregate market value of such common stock held by non-affiliates (based upon
the closing transaction price on the New York Stock Exchange) was approximately
$23,811,001,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended August 31,
1998, only to the extent expressly so stated herein, are incorporated by
reference into parts I, II and IV of Form 10-K. Portions of the registrant's
proxy statement for its 1998 annual meeting of shareholders to be held January
13, 1999, are incorporated by reference into part III of Form 10-K.
PART I
Item 1. Business
(a) General development of business.
Walgreen Co. (the "company" or "Walgreens") is America's largest drugstore
retailer and during the fiscal year ended August 31, 1998, had net sales of
$15.3 billion. The company served customers in 35 states and Puerto Rico
through 2,547 retail drugstores and 2 mail service facilities.
In fiscal 1998, the company opened 304 new or relocated drugstores,
completed remodelings of 47 units, and closed 113 drugstores. More than half of
the stores are now free standing as opposed to being located in strip shopping
centers. In the last five fiscal years, the company has opened 1166 new
drugstores, 1 new mail service facility, completed remodelings of 318 units and
closed 453 drugstores and one mail service facility. In addition, one major
distribution center was added during the five-year period.
The company filled 226 million prescriptions in fiscal 1998 - approximately
9 percent of the U.S. retail market. Prescription sales were 49.6% of total
sales for fiscal 1998 compared to 47.1% in 1997 and 45.2% in 1996. 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.
The company expects to open at least 365 new stores in fiscal 1999.
Expectations are that 3000 drugstores will be operating by the year 2000 with a
goal of 6000 by 2010. Drive-thru prescription service is now offered in nearly
1200 pharmacies and one-hour photo is available at over 90 percent of our
stores.
Effective January 13, 1999, David W. Bernauer will become the company's new
president and chief operating officer. L. Daniel Jorndt will remain the chief
executive officer and Charles R. Walgreen III continues as Chairman.
(b) Financial information about industry segments.
The company's primary business is the operation of retail drugstores.
(c) Narrative description of business.
(i) Principal products produced and services rendered.
The drugstores are engaged in the retail sale of
prescription and nonprescription drugs and carry additional
product lines such as general merchandise, cosmetics,
toiletries, liquor and beverages, and tobacco.
1
The estimated contributions of various product classes to
sales for each of the last three fiscal years are as follows:
Percentage
Product Class 1998 1997 1996
Prescription Drugs 50% 47% 45%
General Merchandise * 23 23 24
Nonprescription Drugs * 12 13 13
Cosmetics, Toiletries * 8 8 8
Liquor, Beverages 5 6 7
Tobacco Products * 2 3 3
Total Sales 100% 100% 100%
* Estimates based, in part, on store scanning information.
(ii) Status of a product or segment.
Not applicable.
(iii Sources and availability of raw materials.
Inventories are purchased from numerous domestic and
foreign suppliers. The loss of any one supplier or group of
suppliers under common control would not have a material effect on
the business.
Fuel and other sources of energy are relied upon for the
distribution of merchandise and in the general operations of the
retail stores. The company has not experienced significant energy
shortages nor have changes in energy costs materially affected the
costs of operations. Energy savings programs are being
implemented to further control these costs.
(iv) Patents, trademarks, licenses, franchises and concessions
held.
Walgreens markets products under various trademarks and
trade names and holds assorted business licenses (pharmacy,
occupational, liquor, etc.) having various lives, which are
necessary for the normal operation of business.
(v) Seasonal variations in business.
The business is seasonal in nature, with Christmas generating
a higher proportion of sales and earnings than other periods. See
the note "Summary of Quarterly Results(Unaudited)" on Page 29
of the Annual Report to Shareholders for the year ended August 31,
1998 ("Annual Report"), which is incorporated herein by reference.
(vi) Working capital practices.
During fiscal 1998 the company obtained funds through the
placement of commercial paper. The company generally finances its
inventory and expansion needs with internally generated funds.
However, short-term borrowings are anticipated during fiscal 1999
to support working capital needs. Long-term borrowings may be
necessary due to the planned increase in owned locations.
Due to the nature of the retail drugstore business, sales are
principally for cash. However, approximately 80% of prescription
sales are now paid by a third party versus cash at the pharmacy
counter. Customer returns are immaterial.
2
(vii) Dependence upon limited number of customers.
Sales are to numerous customers which include various managed
care organizations; therefore, the loss of any one customer or a
group of customers under common control would not have a material
effect on the business. No customer accounts for ten percent or
more of the company's consolidated revenue.
(viii)Backlog Orders.
Not applicable.
(ix) Government contracts.
The company is not a party to any significant government
contracts.
(x) Competitive conditions.
The drug store industry is highly competitive. As one of the
volume leaders in the retail drug industry, Walgreens competes
with various retailers, including chain and independent
drugstores, mail order prescription providers, grocery, variety
and discount department stores. Competition remained keen during
the fiscal year with the company competing on the basis of price,
convenience, service and variety. The company's geographic
dispersion tends to offset the impact of temporary economic and
competitive conditions in individual markets.
Sales by geographic area for fiscal 1998 were as follows:
Percent
State of Sales
Florida 20%
Illinois 14
Texas 8
Arizona 7
California 7
Wisconsin 5
29 other states and Puerto Rico 39
100%
(xi) Research and development activities.
The company does not engage in any material research
activities.
(xii) Environmental disclosures.
Federal, state and local environmental protection
requirements have no material effect upon capital expenditures,
earnings or competitive position of the company.
(xiii)Number of employees.
The company employs approximately 90,000 persons, about
30,000 of whom are part-time employees working less than 30 hours
per week.
(d) Financial information about foreign and domestic operations and
export sales.
All the company sales occur within the continental United
States and Puerto Rico. There are no export sales.
3
Cautionary Note Regarding Forward-Looking Statements
Certain information in this annual report, 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
annual report for the fiscal year ended August 31, 1998, 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 payers 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.
Item 2. Properties
The number and location of the company's drugstores is incorporated by
reference to the table under the caption "Walgreens Nationwide" on page 32 of
the Annual Report. Most of the company's drugstores are leased. The leases are
for various terms and periods. See the caption, "Leases" on page 26 of the
Annual Report, which section is incorporated herein by reference. The company
owns approximately 12% of the retail stores open at August 31, 1998. The
decision has been made to purchase, rather than lease, more store locations in
the future than in the past. This may necessitate future long-term borrowings.
The company has an aggressive expansion program of adding new stores and
remodeling and relocating existing stores. Net selling space of drugstores was
increased from 23.9 million square feet at August 31, 1997, to 26.0 million
square feet at August 31, 1998. Approximately 60% of company stores have been
opened or remodeled during the past five years.
The company's retail drugstore operations are supported by nine
distribution centers with a total of approximately 3,900,000 square feet of
space, of which 2,800,000 square feet is owned. The remaining space is leased
with an option to buy. All warehouses are served by modern distribution systems
for order processing control, operating efficiencies and rapid merchandise
delivery to stores. In addition, the company uses public warehouses to handle
certain distribution needs. The company completed a major addition to its
Windsor, Wisconsin, distribution center in 1998, nearly doubling the facility to
800,000 square feet. Similar work is under way in the Mount Vernon, Illinois,
center. During the next decade, facilities in Pennsylvania, Arizona and
California will be expanded and new, much larger distribution centers will be
built in Florida and Texas. Studies are ongoing to determine where and when
distribution space will be added.
4
The company owns one mail service facility with a ground lease and leases a
second facility. The combined square footage of the facilities is approximately
120,000 square feet. There are four principal office facilities containing
approximately 500,000 square feet of which 400,000 square feet is owned and the
remainder is leased. The mail order and office facilities are adequate for
current needs.
Item 3. Legal Proceedings
On June 21, 1996, the company was served with an action entitled State of
California, ex rel. Louis H. Mueller vs. Walgreen Corporation, Case No. 976292,
which was filed in Superior Court of the State of California, County of San
Francisco. The plaintiff alleges that on occasion Walgreens has in stock an
insufficient amount of a drug to completely fill a prescription for a California
Medical Assistance Program ("Medi-Cal") patient. In those instances, Medi-Cal
is billed for the full prescription, and the customer is requested to return to
the store at a later date for the balance of the prescription. The plaintiff
further alleges that in cases where the patient does not return for the
remainder of the prescription, Medi-Cal is not refunded for the undispensed
portion. The case was dismissed upon company's motion for judgment on the
pleadings, and the order dismissing the case is presently on appeal.
On April 17, 1997, the company was served with an action entitled State of
Illinois, ex rel. Louis H. Mueller vs. Walgreen Corporation, Case No. 96L02373,
which was filed in the Circuit Court of Cook County, Illinois. On November 24,
1998, the company was served with an action entitled United States ex rel. Louis
H. Mueller vs. Walgreen Corporation, Case No. 96-84-Civ-T-23E, which was filed
in federal court in Tampa, Florida. The allegations contained in these
complaints are the same as those contained in the dismissed California action.
These complaints seek treble damages, as well as the imposition of civil
monetary penalties. While the total dollar amount of damages and penalties
sought is material, based upon an internal investigation conducted by the
company, management is of the opinion that, although the ultimate disposition of
these suits cannot be forecast with certainty, this litigation should not have a
material adverse effect on the company's consolidated financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is furnished with respect to each executive officer
of the company as of August 31, 1998:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
L. Daniel Jorndt 57 President, Chief Executive
Chief Executive Officer since Officer and Director
January 1998
President since February 1990
Director since January 1990
Vernon A. Brunner 58 Executive Vice President
Executive Vice President since
February 1990
Glenn S. Kraiss 65 Executive Vice President
Executive Vice President since
February 1990
David W. Bernauer 54 Senior Vice President
Senior Vice President since July 1996
Chief Information Officer since
February 1995
Vice President
February 1990 to July 1996
Roger L. Polark 50 Senior Vice President and
Senior Vice President and Chief Financial Officer
Chief Financial Officer since
February 1995
Vice President June 1988 to February 1995
John A. Rubino 57 Senior Vice President
Senior Vice President since July 1991
William A. Shiel 47 Senior Vice President
Senior Vice President since July 1993
Robert C. Atlas 63 Vice President
Vice President since September 1987
W. Lynn Earnest 55 Vice President
Vice President since July 1992
Treasurer July 1992 to February 1996
Robert H. Halaska 58 Vice President
Vice President since April 1995
President, WHP Health Initiatives, Inc.
since October 1995
President, Walgreens Healthcare Plus,
Inc. since September 1991
Jerome B. Karlin 56 Vice President
Vice President since September 1987
J. Randolph Lewis 48 Vice President
Vice President since March 1996
Divisional Vice President, Logistics
and Planning
September 1992 to February 1996
6
EXECUTIVE OFFICERS OF THE REGISTRANT - continued:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
Julian A. Oettinger 59 Vice President,
Vice President, Secretary and Secretary and
General Counsel since January 1989 General Counsel
William M. Rudolphsen 43 Controller
Controller since January 1998
Director of Accounting
September 1995 to December 1997
Accounting Manager
June 1988 to August 1995
Jeffrey A. Rein 46 Treasurer
Treasurer since March 1996
District Manager
July 1990 to February 1996
There is no family relationship between any of the aforementioned officers
of the company.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The company's common stock is traded on the New York and Chicago Stock
Exchanges under the symbol WAG. As of October 30, 1998 there were 64,476
recordholders of company common stock according to the records maintained
by the company's transfer agent.
The range of the sales prices of the company's common stock by quarters
during the two years ended August 31, 1998, are incorporated herein by reference
to the note "Common Stock Prices" on page 29 of the Annual Report.
The range of the company's cash dividends per common share during the two
years ended August 31, 1998, are as follows:
Quarter Ended 1998 1997
November $.0625 $.06
February .0625 .06
May .0625 .06
August .0625 .06
Fiscal Year $.25 $.24
Item 6. Selected Financial Data
The information in response to this item is incorporated herein by
reference to the caption "Eleven-Year Summary of Selected Consolidated Financial
Data" on pages 18 and 19 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information in response to this item is incorporated herein by
reference to the caption "Management's Discussion and Analysis of Results of
Operations and Financial Condition" on pages 20 and 21 of the Annual Report.
Item 7a. Qualitative and Quantitative Disclosure about Market Risk
Management does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.
Item 8. Financial Statements and Supplementary Data
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
8
PART III
The information required for Items 10, 11, 12 and 13, with the exception of
the information relating to the executive officers of the Registrant, which is
presented in Part I under the heading "Executive Officers of the Registrant", is
incorporated herein by reference to the following sections of the Registrant's
Proxy Statement:
Captions in Proxy
Names and ages of Director nominees,
their principal occupations and
other information
Securities Ownership of Directors and Executive
Officers
Executive Compensation
Certain Relationships
9
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report
(1) The following financial statements, supplementary data, and report
of independent public accountants appearing in the Annual Report are
incorporated herein by reference.
Annual Report
Page Number
Consolidated Statements of Earnings and Shareholders' 22
Equity for the years ended August 31, 1998,
1997 and 1996
Consolidated Balance Sheets at August 31, 1998 and 1997 23
Consolidated Statements of Cash Flows 24
for the years ended August 31, 1998, 1997 and 1996
Statement of Major Accounting Policies 25 - 26
Notes to Consolidated Financial Statements 26 - 29
Report of Independent Public Accountants 30
Walgreens Nationwide 32
(2) The following financial statement schedule and related report of
independent public accountants are included herein.
10-K
Page Number
Schedule II Valuation and Qualifying Accounts 15
Supplemental Report of Independent Public Accountants 16
Schedules I, III, IV and V are not submitted because they are not
applicable or not required or because the required information is
included in the Financial Statements in (1) above or notes thereto.
Other Financial Statements -
Separate financial statements of the registrant have been omitted
because it is primarily an operating company, and all of its
subsidiaries are included in the consolidated financial statements.
(3) Exhibits 10(a) through 10(p) constitute management contracts or
compensatory plans or arrangements required to be filed as exhibits
pursuant to Item 14(c) of this Form 10-K.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter that ended
August 31, 1998.
10
(c) Exhibits
3. (a) Articles of Incorporation of the company, as amended, filed
with the Securities and Exchange Commission as Exhibit 3(a)
to the company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1997, and incorporated by reference
herein.
(b) By-Laws of the company, as amended and restated effective as
of October 14, 1998.
4. (a) (i) Walgreen Co. Debt Securities Indenture dated as of
May 1, 1986, between the company and Harris Trust and
Savings Bank, Trustee, filed with the Securities and
Exchange Commission as Exhibit 4(c) to the company's
Form S-3 Registration Statement on May 22, 1986
(Registration No. 33-5903), and incorporated by
reference herein.
(ii) Walgreen Co. Resolutions of Pricing Committee Relating
to Debt Securities, filed with the Securities and
Exchange Commission as Exhibit 4(a) to the company's
Current Report on Form 8-K dated June 17, 1986
(File No. 1-604), and incorporated by reference herein.
(b) Rights Agreement dated as of July 10, 1996, between the
company and Harris Trust and Savings Bank, filed with
the Securities and Exchange Commission as Exhibit 1. to
Registration Statement on Form 8-A on July 11, 1996, and
incorporated by reference herein.
10. (a) Top Management Long-Term Disability Plan. (Note 3)
(b) Executive short-term Disability Plan Description. (Note 3)
(c) (i) Walgreen Management Incentive Plan (as restated
effective October 12, 1994), filed with the
Securities and Exchange Commission as Exhibit 10(a)
to the company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1994, and incorporated
by reference herein.
(ii) Walgreen Co. Management Incentive Plan Amendment No. 1
(effective April 9, 1997), filed with the Securities and
Exchange Commission as Exhibit 10 to the company's
Quarterly Report on Form 10-Q for the quarter ended
May 31, 1997, and incorporated by reference herein.
(d) Walgreen Co. Restricted Performance Share Plan, as
amended, filed with the Securities and Exchange
Commission as Exhibit 10(a) to the company's Quarterly
Report on Form 10-Q for the quarter ended February 28,
1997, and incorporated by reference herein.
(e) Walgreen Co. Executive Stock Option Plan, as amended,
filed with the Securities and Exchange Commission as
Exhibit 10(b) to the company's Quarterly Report on Form
10-Q for the quarter ended February 28, 1997, and
incorporated by reference herein.
_______________________________________________________________________________
See Notes on page 14.
11
(f) (i) Walgreen Co. 1986 Director's Deferred Fee/Capital
Accumulation Plan. (Note 1)
(ii) Walgreen Co. 1987 Director's Deferred Fee/Capital
Accumulation Plan. (Note 2)
(iii) Walgreen Co. 1988 Director's Deferred Fee/Capital
Accumulation Plan. (Note 4)
(iv) Walgreen Co. 1992 Director's Deferred Retainer
Fee/Capital Accumulation Plan. (Note 8)
(g) (i) Walgreen Co. 1986 Executive Deferred
Compensation/Capital Accumulation Plan. (Note 1)
(ii) Walgreen Co. 1988 Executive Deferred
Compensation/Capital Accumulation Plan. (Note 4)
(iii) Amendments to Walgreen Co. 1986 and 1988 Executive
Deferred Compensation/Capital Accumulation Plans.
(Note 6)
(iv) Walgreen Co. 1992 Executive Deferred Compensation/
Capital Accumulation Plan Series 1. (Note 8)
(v) Walgreen Co. 1992 Executive Deferred Compensation/
Capital Accumulation Plan Series 2. (Note 8)
(vi) Walgreen Co. 1997 Executive Deferred
Compensation/Capital Accumulation Plan Series I,
filed with the Securities and Exchange Commission
as Exhibit 10(c) to the company's Quarterly Report
on Form 10-Q for the quarter ended February 28, 1997,
and incorporated by reference herein.
(vii) Walgreen Co. 1997 Executive Deferred
Compensation/Capital Accumulation Plan Series 2,
filed with the Securities and Exchange Commission
as Exhibit 10(d) to the company's Quarterly
Report on Form 10-Q for the quarter ended February
28, 1997, and incorporated by reference herein.
(h) Walgreen Co. Executive Deferred Profit-Sharing Plan (as
restated effective April 13, 1994), filed with the
Securities and Exchange Commission as Exhibit 10(b) to
the company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1994, and incorporated by reference
herein.
(i) (i) Form of Change of Control Employment Agreements.
(Note 5)
(ii) Amendment to Employment Agreements adopted July 12,
1989. (Note 7)
(j) Walgreen Select Senior Executive Retiree Medical Expense
Plan, filed with the Securities and Exchange Commission as
Exhibit 10(j) to the company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1996, and
incorporated by reference herein.
_______________________________________________________________________________
See Notes on page 14.
12
(k) (i) Walgreen Co. Profit-Sharing Restoration Plan
(restated effective January 1, 1993), filed with the
Securities and Exchange Commission as Exhibit 10(k)
to the company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993 (File No. 1-604),
and incorporated by reference herein.
(ii) Walgreen Profit Sharing Restoration Plan Amendment
No. 1 (effective October 12, 1994), filed as Exhibit
10(c) to the company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1994, and
incorporated by reference herein.
(l) Walgreen Co. Retirement Plan for Outside Directors. (Note 7)
(m) Walgreen Section 162(m) Deferred Compensation Plan
(effective October 12, 1994), filed with the Securities and
Exchange Commission as Exhibit 10(d) to the company's
Quarterly Report on Form 10-Q for the quarter ended
November 30, 1994, and incorporated by reference herein.
(n) Agreement dated October 13, 1994, by and between Walgreen
Co. and Charles D. Hunter (for consulting services), filed
with the Securities and Exchange Commission as Exhibit
10(e) to the company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1994, and incorporated by
reference herein.
(o) (i) Walgreen Co. Nonemployee Director Stock Plan, filed
with the Securities and Exchange Commission as
Exhibit 10(e) to the company's Quarterly Report on
10-Q for the quarter ended February 28, 1997, and
incorporated by reference herein.
(ii) Walgreen Co. Nonemployee Director Stock Plan
Amendment No. 1 (effective September 1, 1997), filed
with the Securities and Exchange Commission as Exhibit
10(o)(ii) to the company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1997, and
incorporated herein.
(iii) Walgreen Co. Nonemployee Director Stock Plan Amendment
No. 2 (effective September 1, 1998).
(p) Agreement dated February 3, 1998, by and between Walgreen Co.
and Charles R. Walgreen III (for consulting services), filed
with the Securities and Exchange Commission as Exhibit 10(a)
to the company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1998, and incorporated by reference
herein.
11. The required information for this Exhibit is contained in the
Consolidated Statements of Earnings and Shareholders Equity for
the years ended August 31, 1998, 1997 and 1996 and also in the
Statement of Major Accounting Policies, each appearing in the
Annual Report and previously referenced in Part IV, Item 14,
Section (a)(1).
_______________________________________________________________________________
See Notes on page 14.
13
13. Annual Report to shareholders for the fiscal year ended August 31,
1998. This report, except for those portions thereof which
are expressly incorporated by reference in this Form 10-K, is
being furnished for the information of the Securities and
Exchange Commission and is not deemed to be "filed" as a part
of the filing of this Form 10-K.
21. Subsidiaries of the Registrant.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
NOTES
(Note 1) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1986 (File No. 1-604), and
incorporated by reference herein.
(Note 2) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1986 (File No. 1-604), and
incorporated by reference herein.
(Note 3) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1990 (File No. 1-604), and
incorporated by reference herein.
(Note 4) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1987 (File No. 1-604), and
incorporated by reference herein.
(Note 5) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Current Report on Form 8-K
dated October 18, 1988 (File No. 1-604), and incorporated by
reference herein.
(Note 6) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1988 (File No. 1-604), and
incorporated by reference herein.
(Note 7) Filed with the Securities and Exchange Commission as
Exhibit 10 to the company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1989 (File No. 1-604),
and incorporated by reference herein.
(Note 8) Filed with the Securities and Exchange Commission as Exhibit
10 to the company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1992 (File No. 1-604), and incorporated
by reference herein.
14
WALGREEN CO. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(Dollars in Millions)
Additions
Balance at Charged to Balance at
Beginning Costs and End
Classification of Period Expenses Deductions of Period
Allowances deducted from receivables
for doubtful accounts -
Year ended August 31, 1998 $ 13 $ 17 $ (19) $ 11
==== ==== ====== ====
Year ended August 31, 1997 $ 14 $ 14 $ (15) $ 13
==== ==== ====== ====
Year ended August 31, 1996 $ 25 $ 2 $ (13) $ 14
==== ==== ====== ====
15
ARTHUR ANDERSEN LLP
SUPPLEMENTAL REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Walgreen Co.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Walgreen Co. and Subsidiaries'
annual report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated September 25, 1998. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole.
Schedule II included in this Form 10-K is the responsibility of the company's
management, is presented for purposes of complying with the Securities and
Exchange Commission's rules, and is not part of the basic financial statements.
Schedule II has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
September 25, 1998
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WALGREEN CO.
(Registrant)
By /s/ R. L. Polark Date: November 25, 1998
R. L. Polark
Senior Vice President
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the dates indicated.
Name Title Date
/s/ C. R. Walgreen III Chairman of the Board November 25, 1998
C. R. Walgreen III and Director
/s/ L. D. Jorndt President, Chief Executive November 25, 1998
L. D. Jorndt Officer and Director
/s/ William M. Rudolphsen Controller November 25, 1998
William M. Rudolphsen
/s/ William C. Foote Director November 25, 1998
William C. Foote
James J. Howard Director November 25, 1998
/s/ C. D. Hunter Director November 25, 1998
C. D. Hunter
/s/ Cordell Reed Director November 25, 1998
Cordell Reed
/s/ John B. Schwemm Director November 25, 1998
John B. Schwemm
William H. Springer Director November 25, 1998
/s/ Marilou M. von Ferstel Director November 25, 1998
Marilou M. von Ferstel
17
INDEX TO EXHIBITS
A. DOCUMENTS FILED WITH THIS REPORT
Exhibit 3(b) By-Laws of the company, as amended and restated.
Exhibit 10(o)(iii) Walgreen Co. Nonemployee Director Stock Plan
Amendment No. 2.
Exhibit 13 Annual Report to Shareholders for the Fiscal
Year Ended August 31, 1998.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 23 Consent of Independent Public Accountants.
Exhibit 27 Financial Data Schedule.
B. DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 3(a) Articles of Incorporation of the company, as amended
Exhibit 4(a)(i) Walgreen Co. Debt Securities Indenture dated
as of May 1, 1986, between the company and
Harris Trust and Savings Bank, Trustee.
Exhibit 4(a)(ii) Walgreen Co. Resolutions of Pricing Committee
Relating to Debt Securities.
Exhibit 4(b) Rights Agreement dated as of July 10, 1996,
between the company and Harris Bank and Trust
Company.
Exhibit 10 Material Contracts
(a) Top Management Long-Term Disability Plan.
(b) Executive Short-Term Disability Plan
Description.
(c) (i) Walgreen Management Incentive Plan,
as restated.
(ii) Walgreen Management Incentive Plan Amendment
No. 1.
(d) Walgreen Co. Restricted Performance Share
Plan, as amended.
(e) Walgreen Co. Executive Stock Option Plan,
as amended.
(f) (i) Walgreen Co. 1986 Director's Deferred
Fee/Capital Accumulation Plan.
(ii) Walgreen Co. 1987 Director's Deferred
Fee/Capital Accumulation Plan.
(iii) Walgreen Co. 1988 Director's Deferred
Fee/Capital Accumulation Plan.
(iv) Walgreen Co. 1992 Director's Deferred
Retainer Fee/Capital Accumulation Plan.
(g) (i) Walgreen Co. 1986 Executive Deferred
Compensation/Capital Accumulation
Plan.
(ii) Walgreen Co. 1988 Executive Deferred
Compensation/Capital Accumulation
Plan.
(iii) Amendments to Walgreen Co. 1986 and
1988 Executive Deferred Compensation/
Capital Accumulation Plans.
(iv) Walgreen Co. 1992 Executive Deferred
Compensation/Capital Accumulation Plan
Series 1.
(v) Walgreen Co. 1992 Executive Deferred
Compensation/Capital Accumulation Plan
Series 2.
(vi) Walgreen Co. 1997 Executive Deferred
Compensation/Capital Accumulation Plan
Series 1.
(vii) Walgreen Co. 1997 Executive Deferred
Compensation/Capital Accumulation Plan
Series 2.
(h) Walgreen Co. Executive Deferred
Profit-Sharing Plan, as restated.
(i) (i) Form of Change of Control Employment
Agreements.
(ii) Amendment to Employment Agreements.
(j) Walgreen Select Senior Executive Retiree
Medical Expense Plan
(k) (i) Walgreen Co. Profit-Sharing Restoration
Plan, as restated.
(ii) Walgreen Profit Sharing Restoration Plan
Amendment No. 1.
(l) Walgreen Co. Retirement Plan for
Outside Directors.
(m) Walgreen Section 162(m) Deferred
Compensation Plan.
(n) Consulting Agreement between Walgreen Co.
and Charles D. Hunter.
(o) (i) Walgreen Co. Nonemployee Director Stock
Plan.
(ii) Walgreen Co. Nonemployee Director Stock
Plan Amendment No. 1.
(p) Consulting Agreement between Walgreen Co.
and Charles R. Walgreen III.
EXHIBIT 3(b)
BY-LAWS
of
WALGREEN CO.
ARTICLE I
OFFICES
SECTION 1. Principal Offices. The principal office of the
corporation shall be located in the State of Illinois and the
corporation may have such other offices, either within or without
the State of Illinois, as the business of the corporation may
require from time to time.
SECTION 2. Registered Office. The registered office of the
corporation required by The Business Corporation Act of the State
of Illinois to be maintained in the State of Illinois may be, but
need not be, identical with the principal office in the State of
Illinois, and the address of the registered office may be changed
from time to time by the Board of Directors.
ARTICLE II
SHAREHOLDERS
SECTION 1. Annual Meeting. (a) The annual meeting of the
shareholders shall be held on the second Wednesday in January in
each year, or such other day in January as the Board of Directors
may designate, at a time set by the Chairman of the Board, for
the purpose of electing directors and for the transaction of such
other business as may properly come before the meeting. If the
day fixed for the annual meeting shall be a legal holiday, such
meeting shall be held on the next succeeding business day. If
the election of directors shall not be held on the day designated
herein for any annual meeting, or at any adjournment thereof, the
Board of Directors shall cause the election to be held at a
meeting of the shareholders as soon thereafter as may be
convenient.
(b) At any annual meeting of the shareholders of the
corporation, only such business shall be conducted as shall have
been brought before the meeting (i) by or at the direction of the
Board of Directors or (ii) by any shareholder of the corporation
that complies with the procedures set forth in this Section 1.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice
thereof in proper written form to the Secretary of the
corporation. To be timely, a shareholder's notice must be
delivered or mailed and received at the principal executive
offices of the corporation not less than ninety (90) days nor
more than one hundred twenty (120) days prior to the date
corresponding to the date of the prior year's annual meeting of
shareholders. To be in proper written form, a shareholder's
notice to the Secretary shall set forth in writing as to each
matter the shareholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and address,
as they appear in the corporation's books, of the shareholder
proposing such business, (iii) the class and number of shares of the
corporation which are beneficially owned by the shareholder and
(iv) any material interest of the shareholder in such business.
Notwithstanding anything in the By-laws to the contrary, no
business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 1. The
Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the
provision of this Section 1, and if he should so determine, he
shall so declare to the meeting that any such business not
properly brought before the meeting shall not be transacted.
SECTION 2. Special Meetings. Special meetings of the
shareholders may be called by the Chairman of the Board, by the
President, by the Board of Directors or by the holders of not
less than one-fifth of all the outstanding shares of the
corporation.
SECTION 3. Place of Meeting. The Board of Directors may
designate any place, either within or without the State of
Illinois, as the place of meeting for any annual meeting or for
any special meeting called by the Board of Directors. If no
designation is made, or if a special meeting be otherwise called
and the Board of Directors fails to designate the place of such
meeting, the place of such meeting shall be the registered office
of the corporation in the State of Illinois.
SECTION 4. Notice of Meetings. Written or printed notice
stating the place, day and hour of the meeting and, in case of a
special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten nor more than sixty
days before the date of the meeting or in the case of a merger,
consolidation, share exchange, dissolution or sale, lease or
exchange of assets not less than twenty days nor more than sixty
days before the date of the meeting, either personally or by
mail, by or at the direction of the Chairman of the Board, the
President, or the Secretary, or the officer or persons calling
the meeting to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, addressed to
the shareholder at his or her address as it appears on the
records of the corporation, with postage thereon prepaid.
SECTION 5. Fixing of Record Date. For the purpose of
determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors
of the corporation may fix in advance a date as the record date
for any such determination of shareholders, such date in any case
to be not more than 60 days and, for a meeting of shareholders,
not less than 10 days, or in the case of a merger, consolidation,
share exchange, dissolution or sale, lease or exchange of assets
not less than 20 days, immediately preceding such meeting. If no
record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or
shareholders entitled to receive payment of a dividend, the date
on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is
adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has
been made as provided in this Section, such determination shall
apply to any adjournment thereof.
SECTION 6. Voting Lists. The officer or agent having charge of
the transfer books for shares of the corporation shall make,
within twenty days after the record date for a meeting of
shareholders or ten days before such meeting, whichever is
earlier, a complete list of the shareholders entitled to vote at
such meeting, arranged in alphabetical order, with the address of
and the number of shares held by each, which list, for a period
of ten days prior to such meeting, shall be kept on file at the
registered office of the corporation and shall be subject to
inspection by any shareholder and to copying at the shareholder's
expense, at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the
meeting and shall be subject to the inspection of any shareholder
during the whole time of the meeting. The original share ledger
or transfer book, or a duplicate thereof kept in this State,
shall be prima facie evidence as to who are the shareholders
entitled to examine such list or share ledger or transfer book or
to vote at any meeting of shareholders.
SECTION 7. Quorum. A majority of outstanding shares entitled
to vote on a matter, represented in person or by proxy, shall
constitute a quorum at any meeting of shareholders; provided that
if less than a majority of the outstanding shares are represented
at said meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. In
no event shall a quorum consist of less than one-third of the
outstanding shares entitled to vote.
If a quorum is present, the affirmative vote of the majority of
the shares represented at the meeting and entitled to vote on a
matter shall be the act of the shareholders, unless the vote of a
greater number or voting by classes is required by The Business
Corporation Act or the Articles of Incorporation of the
corporation.
SECTION 8. Proxies. A shareholder may appoint a proxy to vote
or otherwise act for him or her by signing an appointment form
and delivering it to the person so appointed. No shareholder may
name more than three persons as proxies to attend and vote the
shareholder's shares at any such meeting. Such proxy shall be
filed with the Secretary of the corporation before or at the time
of the meeting. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the
proxy. Every proxy continues in full force and effect until
revoked by the person executing it prior to the vote thereon,
except to the extent such proxy is irrevocable. Such revocation
may be effected by a writing delivered to the corporation stating
that the proxy is revoked, or by a subsequent proxy executed by,
or by attendance at the meeting and voting in person by, the
person executing the proxy. The dates contained on the forms of
proxy presumptively determine the order of execution, regardless
of the postmark dates on the envelopes in which they are mailed.
Notwithstanding any provision contained in these By-Laws, a
shareholder may electronically transmit or authorize the
electronic transmission of his or her proxy, if done as
proscribed by law.
SECTION 9. Voting of Shares. Subject to the provisions of
Section 11 of this Article, each outstanding share, regardless of
class, shall be entitled to one vote upon each matter submitted
to a vote at a meeting of shareholders.
SECTION 10. Voting of Shares by Certain Holders. Shares of the
corporation held by the corporation in a fiduciary capacity may
be voted and shall be counted in determining the total number of
outstanding shares entitled to vote at a given time.
Shares registered in the name of another corporation, domestic
or foreign, may be voted by any officer, agent, proxy or other
legal representative authorized to vote such shares under the law
of incorporation of such corporation. The corporation may treat
the president or other person holding the position of chief
executive officer of such other corporation as authorized to vote
such shares, together with any other person indicated and any
other holder of an office indicated by the corporate shareholder
to the corporation as a person or an office authorized to vote
such shares as the by-laws of such corporation may prescribe, or,
in the absence of such provision, as the board of directors of
such corporation may determine.
Shares registered in the name of a deceased person, a minor ward
or person under legal disability, may be voted by his or her
administrator, executor, or court appointed guardian, either in
person or by proxy without a transfer of such shares into the
name of such administrator, executor, or court appointed
guardian. Shares registered in the name of a trustee may be
voted by him or her, either in person or by proxy.
Shares registered in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer thereof into
his or her name if authority so to do is contained in an
appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name
of the pledgee, and thereafter the pledgee shall be entitled to
vote the shares so transferred.
SECTION 11. Cumulative Voting. In all elections for
directors, every shareholder shall have the right to vote, in
person or by proxy, the number of shares owned by such
shareholder, for as many persons as there are directors to be
elected, or to cumulate such votes and give one candidate as many
votes as shall equal the number of directors multiplied by the
number of such shares, or to distribute such cumulative votes in
any proportion among any number of candidates.
SECTION 12. Voting by Ballot. Voting on any question or in any
election may be viva voce unless the presiding officer shall
order that voting be by ballot.
SECTION 13. Adjournments. Any meeting of shareholders may be
adjourned. Notice of the adjourned meeting or of the business to
be transacted there, other than by announcement at the meeting at
which the adjournment is taken, shall not be necessary, unless
otherwise required by law. At an adjourned meeting at which a
quorum is present or represented, any business may be transacted
which could have been transacted at the meeting originally
called.
SECTION 14. Inspectors of Election. The Board of Directors, in
advance of any meeting of shareholders, may appoint one or more
persons as inspectors to act at such meeting or any adjournment
thereof. If inspectors of election are not so appointed, the
person acting as chairman at any such meeting may, and on the
request of any shareholder shall, make such appointment.
The inspectors shall ascertain and report the number of shares
represented at the meeting, based upon their determination of the
validity and effect of proxies; count all votes and report the
results; and do such other acts as are proper to conduct the
election and voting with impartiality and fairness to all the
shareholders.
Each report of an inspector shall be in writing and signed by
him or her or by a majority of them if there is more than one
inspector acting at such meeting. If there is more than one
inspector, the report of a majority shall be the report of the
inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of
the voting shall be prima facie evidence thereof.
SECTION 15. Notice of Shareholder Nominees. Only persons who
are nominated in accordance with the procedures set forth in this
Section 15 shall be eligible for election at a meeting of
shareholders as directors of the corporation. Nominations of
persons for election to the Board of Directors of the corporation
may be made at a meeting of shareholders (a) by or at the
direction of the Board of Directors or (b) by any shareholder of
the corporation who is a shareholder of record at the time of
giving of notice provided for in this Section, who shall be
entitled to vote for the election of directors at the meeting and
who complies with the procedures set forth in this Section 15.
Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received
at the principal executive offices of the corporation not less
than 30 days nor more than 60 days prior to the meeting;
provided, however, that in the event that less than 40 days'
notice or prior public disclosure of the date of the meeting is
given or made to shareholders, notice by the shareholder to be
timely must be so received not later than the close of business
on the 10th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was
made. Such shareholder's notice shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or
re-election as a director, all information relating to such
person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (including, without
limitation, such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if
elected); and (b) as to the shareholder giving the notice (i) the
name and address, as they appear on the corporation's books, of
such shareholder and (ii) the class and number of shares of the
corporation which are beneficially owned by such shareholder. At
the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish
to the Secretary of the corporation that information required to
be set forth in a shareholder's notice of nomination which
pertains to the nominee. No person shall be eligible to serve as
a Director of the corporation unless nominated in accordance with
the procedures set forth in this by-law. The Chairman of the
meeting shall, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the
procedures prescribed by the By-laws, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Section 15, a shareholder shall also comply
with all applicable requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder
with respect to the matters set forth in this Section.
SECTION 16. Action by Written Consent. (a) In order that the
corporation may determine the shareholders entitled to consent to
corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which date shall not be
more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. Any
shareholder of record seeking to have the shareholders authorize
or take corporate action by written consent shall, by written
notice to the Secretary, request the Board of Directors to fix a
record date. The Board of Directors shall promptly, but in all
events within 10 days after the date on which such a request is
received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board of Directors within 10
days of the date on which such a request is received, the record
date for determining shareholders entitled to consent to
corporate action in writing without a meeting, when no prior
action by the Board of Directors is required by applicable law,
shall be the first date on which a signed written consent setting
forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its principal place of business or
to any officer or agent of the corporation having custody of the
book in which proceedings of meetings of shareholders are
recorded. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required
by applicable law, the record date for determining shareholders
entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the date on which
the Board of Directors adopts the resolution taking such prior
action.
(b) Every written consent shall bear the date of signature of
each shareholder who signs the consent and no written consent
shall be effective to take the corporate action referred to
therein unless, within 60 days of the record date established in
accordance with paragraph (a) of this Section 16, a written
consent or consents signed by a sufficient number of holders to
take such action are delivered to the corporation in the manner
prescribed in paragraph (a) of this Section.
(c) In the event of the delivery, in the manner provided by this
Section, to the corporation of the requisite written consent or
consents to take corporate action and/or any related revocation
or revocations, the corporation shall engage nationally
recognized independent inspectors of elections for the purpose of
promptly performing a ministerial review of the validity of the
consents and revocations. For the purpose of permitting a prompt
ministerial review by the independent inspectors, no action by
written consent without a meeting shall be effective until the
earlier of (i) five business days following delivery to the
corporation of consents signed by the holders of the requisite
minimum number of votes that would be necessary to take such
action, which delivery shall be accompanied by a certification by
the shareholder of record (or his or her designee) who delivered,
in accordance with paragraph (a) above, the written notice to the
Secretary requesting the Board of Directors to fix a record date
or (ii) such date as the independent inspectors certify to the
corporation that the consents delivered to the corporation in
accordance with this Article represent at least the minimum
number of votes that would be necessary to take the corporate
action. Nothing contained in this paragraph shall in any way be
construed to suggest or imply that the Board of Directors or any
shareholder shall not be entitled to contest the validity of any
consent or revocation thereof, whether during or after such five
business day period, or to take any other action (including,
without limitation, the commencement, prosecution or defense of
any litigation with respect thereto).
ARTICLE III
DIRECTORS
SECTION 1. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of its
Board of Directors.
SECTION 2. Number, Tenure and Qualifications. The number of
directors of the corporation shall be not less than seven nor
more than twelve. Within the limits above specified, the number
of directors shall be determined from time to time by resolution
of the Board of Directors or by resolution of the shareholders.
Each director shall hold office until the next annual meeting of
shareholders or until his or her successor shall have been
elected. Directors need not be residents of Illinois or
shareholders of the corporation. It shall be the policy of the
corporation not to nominate as a director any person who has
reached his or her seventieth birthday.
A director may resign at any time by giving written notice to
the Board of Directors, its Chairman or to the President or
Secretary of the corporation. A resignation shall be effective
when the notice is given, unless the notice specifies a future
date.
SECTION 3. Regular Meetings. A regular annual meeting of the
Board of Directors shall be held without other notice than this
by-law, immediately after, and at the same place as, the annual
meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place, either within or without the
State of Illinois, for the holding of additional regular meetings
without other notice than such resolution; but if not so provided
then such additional regular meetings may be convened in the same
manner as provided in Section 4 of this Article in respect of
special meetings.
SECTION 4. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of
the Board or any two directors. The person or persons authorized
to call special meetings of the Board of Directors may fix any
place, either within or without the State of Illinois, as the
place for holding any special meeting of the Board of Directors
called by them.
SECTION 5. Notice. Notice of any special meeting shall be
given at least one day prior thereto if notice is given
personally, at least two days prior thereto if notice is given by
telegram or by a delivery service assuring delivery within twenty-
four hours, or at least five days prior thereto if notice is
given by mail. If notice is given by telegram, such notice shall
be deemed to be delivered when the telegram, addressed to the
director at his or her business address, is delivered to the
telegraph company. If notice is given by delivery service, such
notice shall be deemed to be delivered when delivered, so
addressed, to the delivery service company. If mailed, such
notice shall be deemed to be delivered when deposited in the
United States mail addressed to the director at his or her
business address, with postage thereon prepaid. Any director may
waive notice of any meeting. The attendance of a director at any
meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, any regular or special
meeting of the Board of Directors need be specified in the notice
or waiver of notice of such meetings.
SECTION 6. Quorum. A majority of the Board of Directors then
in office, but in no event less than a majority of the minimum
number of directors specified in Section 2 of this Article shall
constitute a quorum for the transaction of business at any
meeting of the Board of Directors, provided that if less than a
majority of the directors are present at said meeting, a majority
of the directors present may adjourn the meeting from time to
time without further notice.
SECTION 7. Manner of Acting. Except as provided in the
Articles of Incorporation of the corporation, the act of the
majority of the directors present at a meeting at which a quorum
is present shall be the act of the Board of Directors.
SECTION 8. Vacancies. Any vacancy occurring in the Board of
Directors and any directorship to be created by reason of an
increase in the number of directors may be filled by (i) election
at an annual meeting or election at a special meeting of
shareholders called for that purpose or (ii) election by the
Board of Directors at any regular meeting or special meeting of
the Board of Directors.
SECTION 9. Presumption of Assent. A director of the
corporation who is present at a meeting of the Board of Directors
at which action on any corporate matter is taken shall be
conclusively presumed to have assented to the action taken unless
his or her dissent is entered in the minutes of the meeting or
unless such director shall file his or her written dissent to
such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such
dissent by registered or certified mail to the Secretary of the
corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in
favor of such action.
SECTION 10. Informal Action by Directors. Any action required
to be taken at a meeting of the Board of Directors, or any other
action which may be taken at a meeting of the Board of Directors,
may be taken without a meeting if a consent in writing setting
forth the action so taken shall be signed by all the directors
entitled to vote with respect to the subject matter thereof.
SECTION 11. Adjournment. Any meeting of the Board of Directors
may be adjourned. Notice of the adjourned meeting or of the
business to be transacted there, other than by announcement at
the meeting at which the adjournment is taken, shall not be
necessary. At an adjourned meeting at which a quorum is present,
any business may be transacted which could have been transacted
at the meeting originally called.
SECTION 12. Directors Conflict of Interest. If a transaction
is fair to the corporation at the time it is authorized, approved
or ratified, the fact that a director of the corporation is
directly or indirectly a party to the transaction shall not be
grounds for invalidating the transaction.
SECTION 13. Compensation of Directors. By the affirmative vote
of a majority of the directors then in office, and irrespective
of any personal interest of any member of the Board of Directors,
the Board of Directors may establish reasonable compensation of
all directors for services to the corporation as directors,
officers or otherwise. No such establishment of reasonable
compensation shall be deemed a director conflict of interest.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. Establishment of Committees. A majority of the
directors may create one or more committees and appoint members
of the Board of Directors to serve on the committee or
committees. Each committee shall have two or more members, who
serve at the pleasure of the Board of Directors. The Board of
Directors may designate one or more directors as alternate
members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. Any
vacancy in a committee may be filled by the Board of Directors.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors as required.
SECTION 2. Manner of Acting. A majority of any committee shall
constitute a quorum and a majority of a quorum shall be necessary
for action by any committee. A committee may act by unanimous
consent in writing without a meeting. The committee, by majority
vote of its members, shall determine the time and place of
meetings and the notice required therefor.
SECTION 3. Authority of Committees. To the extent specified by
resolution of the Board of Directors and these By-laws, each
committee may exercise the authority of the Board of Directors,
provided, however, a committee may not:
a) authorize distributions;
b) approve or recommend to shareholders any act requiring
the approval of shareholders;
c) fill vacancies on any committee;
d) elect or remove officers or fix the compensation of any
member of the committee;
e) adopt, amend or repeal these By-laws;
f) approve a plan of merger not requiring shareholder
approval;
g) authorize or approve reacquisition of shares, except
according to a general formula or method prescribed by
the Board of Directors;
h) authorize or approve the issuance or sale, or contract
for sale, of shares, or determine the designation and
relative rights, preferences, and limitations of a series
of shares, except that a committee may fix the specific
terms of the issuance or sale or contract for sale, or
the number of shares to be allocated to particular
employees under an employee benefit plan; or
i) amend, alter, repeal, or take action inconsistent with
any resolution or action of the Board of Directors when
the resolution or action of the Board of Directors
provides by its terms that it shall not be amended,
altered or repealed by action of a committee.
SECTION 4. Executive Committee. The Board of Directors may
establish an Executive Committee. The Executive Committee,
during intervals between meetings of the Board of Directors,
shall have, and may exercise, subject to the limitations
contained in Section 3 of this Article, the powers of the Board
of Directors in the management of the business and affairs of the
corporation.
SECTION 5. Compensation Committee. The Board of Directors may
establish a Compensation Committee consisting of directors who
are not otherwise employed by the corporation. The Compensation
Committee shall review, from time to time, the salaries,
compensation and employee benefits of the officers and employees
of the corporation and shall make recommendations to the Board of
Directors concerning such matters.
SECTION 6. Audit Committee. The Board of Directors shall
establish an Audit Committee consisting of directors who are not
otherwise employed by the corporation. The Audit Committee shall
review the selection and qualifications of the independent public
accountants employed by the corporation to audit the financial
statements of the corporation and the scope and adequacy of their
audits. The Audit Committee shall also consider recommendations
made by such independent public accountants, review the internal
financial audits of the corporation, and report any additions or
changes it deems advisable to the Board of Directors.
SECTION 7. Nominating and Governance Committee. The Board of
Directors may establish a Nominating and Governance Committee
consisting of directors who are not otherwise employed by the
corporation. The Nominating and Governance Committee shall
consider matters related to corporate governance, develop general
criteria regarding the selection and qualifications for members
of the Board of Directors and shall recommend candidates for
election to the Board of Directors.
SECTION 8. Finance Committee. The Board of Directors may
establish a Finance Committee. The Finance Committee shall
review major financial decisions of the corporation and shall
make recommendations to the Board of Directors concerning such
matters.
ARTICLE V
OFFICERS
SECTION 1. Number. The officers of the corporation shall be a
Chairman of the Board, a President, and such Executive or Senior
Vice Presidents and other Vice Presidents as the Board of
Directors may from time to time elect or appoint, a Treasurer, a
Controller, a General Auditor and a Secretary, and such Assistant
Treasurers, Assistant Secretaries, Assistant Controllers or other
officers as may be from time to time elected or appointed by the
Board of Directors. Any two or more offices may be held by the
same person.
SECTION 2. Election and Term of Office. The officers of the
corporation shall be elected annually by the Board of Directors
at the first meeting of the Board of Directors held after each
annual meeting of shareholders. If the election of officers
shall not be held at such meeting, such election shall be held as
soon thereafter as may be convenient. Each officer shall hold
office until his or her successor shall have been duly elected
and shall have qualified or until his or her death or until he or
she shall resign or shall have been removed in the manner
hereinafter provided. No officer shall be elected or re-elected
after reaching sixty-five years of age.
SECTION 3. Removal. Any officer or agent of the corporation
may be removed by the Board of Directors whenever in its judgment
the best interests of the corporation will be served thereby, but
such removal shall be without prejudice to the contract rights,
if any, of the person so removed. Election or appointment of an
officer or agent shall not of itself create contract rights.
SECTION 4. Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification or otherwise, may
be filled by the Board of Directors for the unexpired portion of
the term.
SECTION 5. Chief Executive Officer. The Chairman of the Board
may, but need not, be the Chief Executive Officer of the
corporation. The Chief Executive Officer shall determine and
administer the policies of the corporation, subject to the
instructions of the Board of Directors.
Except where, by law, the signature of some other officer or
agent of the corporation is required, the Chief Executive Officer
may sign: certificates for shares of the corporation; any deeds,
mortgages, bonds, leases concerning real and personal property
both as landlord and as tenant; contracts and other instruments
in furtherance of the business of the corporation, including
instruments of guaranty as to any of such documents which may be
executed by subsidiaries of the corporation; proxies on behalf of
the corporation with respect to the voting of any shares of stock
owned by the corporation; and assignments of shares of stock
owned by the corporation. The Chief Executive Officer shall have
the power to appoint such agents and employees as in the Chief
Executive Officer's judgment may be necessary or proper for the
transaction of the business of the corporation and to fix their
compensation, all subject to the ratification of the Board of
Directors.
The Chief Executive Officer shall submit to the Board of
Directors, prior to the date of the annual meeting of
shareholders, an annual report of the operations of the
corporation and its subsidiaries, including a balance sheet
showing the financial condition of the corporation and its
subsidiaries consolidated as at the close of such fiscal year and
statements of consolidated income and surplus. The Chief
Executive Officer shall perform such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 6. Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the Board of Directors.
SECTION 7. President. The President shall be the Chief
Operating Officer of the corporation and shall in general be in
charge of the operations of the corporation. The President may,
but need not, be the Chief Executive Officer.
Except where, by law, the signature of some other officer or
agent of the corporation is required, the President or a Vice
President may sign: certificates for shares of the corporation;
any deeds, mortgages, bonds, leases concerning real and personal
property both as landlord and as tenant; contracts or other
instruments in furtherance of the business of the corporation,
including instruments of guaranty as to any of such documents
which may be executed by subsidiaries of the corporation; proxies
on behalf of the corporation with respect to the voting of any
shares of stock owned by the corporation; and assignments of
shares of stock owned by the corporation. The President shall
perform such other duties as may be prescribed by the Board of
Directors from time to time.
SECTION 8. The Vice Presidents. In the absence of the President
or in the event of the President's inability or refusal to act, a
Vice President, selected by the Board of Directors, shall perform
the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the
President. Each Vice President may execute documents as provided
in Section 7 of this Article and shall perform such other duties
as from time to time may be assigned to such Vice President by
the Chief Executive Officer, the President or by the Board of
Directors. The Board of Directors may designate one or more of
the Vice Presidents as Executive or Senior Vice President with
such additional duties as from time to time may be assigned by
the Chief Executive Officer, the President or by the Board of
Directors.
SECTION 9. The Treasurer. The Treasurer shall have the custody
of all of the funds and securities of the corporation. When
necessary and proper the Treasurer shall endorse, or authorize on
behalf of the corporation the endorsement of, all checks, notes
or other obligations and evidences of the payment of money,
payable to the corporation or coming into the Treasurer's
possession, and shall deposit the funds arising therefrom with
all other funds of the corporation, coming into the Treasurer's
possession, in such banks as may be selected as the depositories
of the corporation, or properly care for them in such other
manner as the Board of Directors may direct. Either alone or
jointly with the Chief Executive Officer, the President or such
other officers as may be designated by the Board of Directors,
the Treasurer shall, except as herein otherwise provided, be
authorized to sign all checks and other instruments drawn on or
payable out of the funds of the corporation, and all bills, notes
and other evidences of indebtedness of the corporation. Whenever
required by the Board of Directors to do so, the Treasurer shall
exhibit a complete and true statement of the Treasurer's cash
account and of the securities and other property in the
Treasurer's possession, custody or control. The Treasurer shall
enter, or direct or cause to be entered, regularly in books
belonging to the corporation and to be kept by the Treasurer for
such purpose, a full and accurate account of all money received
and paid by the Treasurer on account of the corporation, together
with all other business transactions. The Treasurer shall, at
all reasonable times within the hours of business, exhibit the
Treasurer's books and accounts to any director. The Treasurer
shall perform all duties which are incident to the office of the
Treasurer of a corporation, subject, however, at all times to the
direction and control of the Board of Directors. If the Board of
Directors shall so require, the Treasurer shall give bond, in
such sum and with such securities as the Board of Directors may
direct, for the faithful performance of the Treasurer's duties
and for the safe custody of the funds and property of the
corporation coming into the Treasurer's possession.
SECTION 10. The Secretary. The Secretary shall keep the
minutes of all meetings of the Board of Directors, the minutes of
all meetings of the committees of the Board of Directors, and the
minutes of all meetings of the shareholders, in books provided by
the corporation for such purposes, and shall act as Secretary at
all such meetings. The Secretary shall attend to the giving and
serving of all notices of the corporation of meetings of the
Board of Directors, committees of the Board of Directors and
shareholders. The Secretary shall prepare all lists of
shareholders and their addresses required to be prepared by the
provisions of any present or future statute of the State of
Illinois. The Secretary may sign with the Chief Executive
Officer, the President or a Vice President, in the name of the
corporation, all contracts and instruments and may affix the seal
of the corporation thereto. The Secretary shall have charge of
such books and papers as the Board of Directors may direct. The
Secretary shall have the authority to certify the By-laws,
resolutions of the Board of Directors and the committees thereof,
and other documents of the corporation as true and correct copies
thereof. The Secretary shall, in general, perform all the duties
which are incident to the office of Secretary of a corporation,
subject at all times to the direction and control of the Board of
Directors.
SECTION 11. The Controller. The Controller shall be the
principal accounting officer of the corporation and shall be in
charge of all general and cost accounting books and records of
the corporation, and shall see that all moneys due to the
corporation, all disbursements and all properties and assets are
properly accounted for. The Controller shall prepare the
corporation's balance sheets, income accounts and other financial
statements and reports, and render on a periodic basis a report
covering the operations of the corporation for the month and year
to date. The Controller shall perform all duties which are
incident to the office of the Controller of a corporation,
subject, however, at all times to the control of the Board of
Directors.
SECTION 12. General Auditor. The General Auditor shall be
responsible for the conduct of audits in order to determine that
the corporation's accounting systems of internal checks and
balances are properly designed and function so that the
corporation's assets are being adequately protected. The General
Auditor shall perform audits of any of the corporation's
operations and accounting which will permit him or her to
adequately discharge the General Auditor's responsibilities. The
General Auditor shall render findings to the General Auditor's
immediate superior and, in the event that in the General
Auditor's opinion, proper corrective action is not being taken or
the General Auditor is being denied free access to information
needed to perform the General Auditor's duties, shall have the
right, and it is the General Auditor's responsibility, to report
this to the Chief Executive Officer of the corporation or
directly to the Board of Directors.
SECTION 13. Assistant Treasurers, Assistant Secretaries and
Assistant Controllers. The Assistant Treasurers shall
respectively, if required by the Board of Directors, give bonds
for the faithful discharge of their duties in such sums and with
such sureties as the Board of Directors shall determine. Each
Assistant Treasurer, Assistant Secretary and Assistant
Controller, in the absence or inability or refusal to act of the
Treasurer, the Secretary or the Controller, as the case may be,
may perform the duties of the office to which he or she is an
assistant and in general shall perform such duties as shall be
assigned to him or her by the Treasurer, the Secretary or the
Controller, respectively, or by the Chief Executive Officer, the
President or the Board of Directors.
SECTION 14. Execution of Agreements. The Chief Executive
Officer, the Chairman of the Board or the President or any Vice
President, at any time and without any express authority of the
Board of Directors may sign and execute all agreements to sell,
purchase, lease or otherwise acquire stores or other property of,
in behalf of, and for the corporation. The authority herein
given by this paragraph shall not impair or restrict any
authority, expressed, implied or otherwise, herein conferred upon
any officer or officers.
SECTION 15. Salaries. The salaries of the officers shall be
fixed from time to time by the Board of Directors and no officer
shall be prevented from receiving such salary by reason of the
fact that such officer is also a director of the corporation.
ARTICLE VI
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. Right to Indemnification. Each person who was or is
a party, or is threatened to be made a party to or called as a
witness in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative and any appeal thereof (hereinafter a
"proceeding"), by reason of the fact that he or she is, was or
agreed to become a director or officer, of the corporation or is
or was serving at the request of the corporation as a director,
officer, employee, trustee, fiduciary or agent of another
corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action in
an official capacity as a director, officer, employee, trustee,
fiduciary or agent, shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the Illinois
Business Corporation Act, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide
broader indemnification rights than said law permitted the
corporation to provide prior to such amendment), against all
expenses (including attorneys' fees and other expenses of
litigation), judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement actually and reasonably incurred
by such person in connection therewith and such indemnification
shall continue as to a person who has ceased to be a director,
officer, employee, trustee, fiduciary or agent and shall inure to
the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in Section 2 hereof,
the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors of the
corporation. The right to indemnification conferred by this
Article shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of
its final disposition, including any appeal thereof; provided
however, that, if the Illinois Business Corporation Act requires,
the payment of such expenses incurred by a director or officer in
his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation,
service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to
the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced unless it
shall ultimately be determined that such director or officer is
entitled to be indemnified under this Article or otherwise. The
corporation may, by action of its Board of Directors, provide (a)
indemnification to employees and agents of the corporation or
others and (b) for such other indemnification of persons
indemnified by this Article as it deems appropriate.
SECTION 2. Right of Claimant to Bring Suit. If a claim under
Section 1 of this Article is not paid in full by the corporation
within thirty days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting the claim. It
shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the
corporation) that indemnification of the claimant is prohibited
by applicable law, but the burden of proving such defense shall
be on the corporation. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel, or
its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant
is proper in the circumstances, nor an actual determination by
the corporation (including its Board of Directors, independent
legal counsel, or its shareholders) that indemnification of the
claimant is prohibited by applicable law, shall be a defense to
the action or create a presumption that indemnification of the
claimant is prohibited by applicable law.
SECTION 3. Non-Exclusivity of Rights. The right to
indemnification and the payment of expenses incurred in defending
a proceeding in advance of its final disposition conferred in
this Article shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision
of the corporation's Articles of Incorporation, By-laws,
agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office.
SECTION 4. Insurance. The corporation may purchase and maintain
insurance, at its expense, to protect itself and any person who
is or was a director, officer, employee, fiduciary, trustee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership joint venture, trust or other
enterprise (including employee benefit plans) against any
liability asserted against such person and incurred by such
person in any such capacity, or arising out of his or her status
as such, whether or not the corporation would have the power to
indemnify such person against such liability under the Illinois
Business Corporation Act.
SECTION 5. Report to Shareholders. The corporation shall report
in writing to shareholders any indemnity or advanced expenses
paid to a director, officer, employee or agent with or before the
notice of the next shareholders' meeting.
SECTION 6. Contractual Nature. The provisions of this Article
shall be applicable to all proceedings commenced or continuing
after its adoption, whether such arise out of events, acts or
omissions which occurred prior or subsequent to such adoption,
and shall continue as to a person who has ceased to be a
director, officer or a person serving at the request of the
corporation as a director, trustee, fiduciary, employee, agent or
officer of another corporation, partnership, joint venture, trust
or other enterprise and shall inure to the benefit of the heirs
of such person. This Article shall be deemed to be a contract
between the corporation and each person who, at any time that
this Article is in effect, serves or agrees to serve in any
capacity which entitles him to indemnification hereunder and any
repeal or other modification of this Article or any repeal or
modification of the Illinois Business Corporation Act or any
other applicable law shall not limit any rights of
indemnification for proceedings then existing or later arising
out of events, acts or omissions occurring prior to such repeal
or modification, including, without limitation, the right to
indemnification for proceedings commenced after such repeal or
modification to enforce this Article with regard to proceedings
arising out of acts, omissions or events occurring prior to such
repeal or modification.
SECTION 7. Severability. If any portion of this Article shall
be invalidated or held to be unenforceable on any ground by any
court of competent jurisdiction, the decision of which shall not
have been reversed on appeal, such invalidity or unenforceability
shall not affect the other provisions hereof, and this Article
shall be construed in all respects as if such invalid or
unenforceable provisions had been omitted therefrom.
ARTICLE VII
CONTRACTS, CHECKS AND DEPOSITS
SECTION 1. Contracts. The Board of Directors may authorize any
officer or officers, agent or agents, to enter into any contract
or execute and deliver any instrument in the name of and on
behalf of the corporation, and such authority may be general or
confined to specific instances.
SECTION 2. Checks, Drafts, and Orders for the Payment of Money.
The Board of Directors may appoint one or more persons who may
severally be authorized by the Board of Directors to sign checks,
drafts, or orders for the payment of money and any or all of whom
may be further authorized by the Board of Directors, in its
discretion, to authorize other individuals to sign checks,
drafts, or orders for the payment of money.
SECTION 3. Deposits. The Board of Directors may appoint one or
more persons who may severally be authorized by the Board of
Directors to select and designate as a depository of and for the
moneys and funds of the corporation such bank or banks as such
person may from time to time determine; and the said person or
persons so authorized by the Board of Directors may further be
authorized severally to terminate and cancel the designation of any
bank or banks as a depository of this corporation.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. The shares of the
corporation may be represented by certificates signed by the
Chairman of the Board or Chief Executive Officer, the President
or a Vice President and the Secretary or an Assistant Secretary
and sealed with the seal of the corporation. Such seal may be a
facsimile. Where such certificate is countersigned by a transfer
agent other than the corporation itself or an employee of the
corporation, or by a transfer clerk and registered by a
registrar, the signatures of the Chairman of the Board or Chief
Executive Officer, the President or Vice President and the
Secretary or Assistant Secretary upon such certificate may be
facsimiles, engraved or printed. In case any officer who has
signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with
the same effect as if such officer had not ceased to be such at
the date of its issue. All certificates for shares shall be
consecutively numbered or otherwise identified. The name of the
person to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered on the
books of the corporation. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate
shall be issued until the former certificate for a like number of
shares shall have been surrendered and canceled, except that in
case of a lost, destroyed or mutilated certificate a new one may
be issued therefor upon such terms and indemnity to the
corporation as the Board of Directors may prescribe.
SECTION 2. Transfer of Shares. Transfer of shares of the
corporation shall be made only on the books of the corporation by
the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to
transfer, or by his or her attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary of the
corporation, and on surrender for cancellation of the certificate
for such shares. The person in whose name shares stand on the
books of the corporation shall be deemed the owner thereof for
all purposes as regards the corporation.
SECTION 3. Transfer Agent and Registrar. The Board of Directors
may from time to time appoint such Transfer Agents and Registrars
in such locations as it shall determine, and may, in its
discretion, appoint a single entity to act in the capacity of
both Transfer Agent and Registrar in any one location.
ARTICLE IX
FISCAL YEAR
The fiscal year of the corporation shall begin on the first day
in September in each year and shall end on the succeeding thirty-
first day of August.
ARTICLE X
DIVIDENDS
The Board of Directors may from time to time declare and the
corporation may pay dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its
Articles of Incorporation.
ARTICLE XI
SEAL
The Board of Directors shall provide a corporate seal which
shall be in the form of a circle and shall have inscribed thereon
the name of the corporation and the words "Corporate Seal,
Illinois".
ARTICLE XII
WAIVER OF NOTICE
Whenever any notice whatever is required to be given under the
provisions of these By-laws or under the provisions of the
Articles of Incorporation or under the provisions of The Business
Corporation Act of the State of Illinois, a waiver thereof in
writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
ARTICLE XIII
AMENDMENTS
SECTION 1. By Directors. These By-laws may be altered, amended
or repealed and new By-laws may be adopted at any meeting of the
Board of Directors of the corporation by a majority vote of the
directors present at the meeting, subject to the restrictions set
forth in Section 2 of this Article.
SECTION 2. By Shareholders. These By-laws may be altered,
amended or repealed and new By-laws may be adopted by the
shareholders at any annual meeting, or at any special meeting
called for such purpose. If such By-law so provides, a By-law
adopted by the shareholders may not be altered, amended or
repealed by the Board of Directors.
EXHIBIT 10(o)(iii)
Walgreen Co. Nonemployee Director Stock Plan
Amendment No. 2
(effective September 1, 1998)
I
Section 5.1 of the Plan shall be amended to read as follows:
5.1 Annual Equity Grants. Commencing November 1,
1998, each Nonemployee Director shall receive an annual
equity grant of 1,000 shares on November 1 each year, or a
proportionate share of such grant based on full months of
service as Nonemployee Director since the prior November 1.
In lieu of issuing fractional shares, the Company shall
round to the nearest full share.
II
Section 5.3 of the Plan shall be amended to read as follows:
5.3 Annual Review. The Committee shall conduct an
annual review of the appropriateness of the equity Awards
granted pursuant to this Article 5. In the event the
Committee determines that an adjustment in the amount of
equity Awards pursuant to this Article 5 is appropriate, the
Committee shall make a recommendation to the Board for an
appropriate amendment.
Exhibit 13
<TABLE>
_______________________________________________________________________________
Eleven-Year Summary of Selected Consolidated Financial Data
Walgreen Co. and Subsidiaries
(Dollars in Millions, except per share data)
________________________________________________________________________________
<CAPTION>
Fiscal Year 1998 1997 1996 1995
<S> <C> <C> <C> <C>
Net Sales $15,307 $13,363 $11,778 $10,395
Costs and Deductions
Cost of sales 11,140 9,682 8,515 7,482
Selling, occupancy and
administration 3,332 2,973 2,659 2,393
Other (income) expense (1) (42) (4) (3) (4)
Total Costs and Deductions 14,430 12,651 11,171 9,871
Earnings
Earnings before income tax
provision and cumulative effect
of accounting changes 877 712 607 524
Income tax provision 340 276 235 203
Earnings before cumulative effect
of accounting changes 537 436 372 321
Cumulative effect of accounting
changes (2) (26) - - -
Net Earnings $ 511 $ 436 $ 372 $ 321
Per Common Share (3)
Earnings before cumulative effect
of accounting changes
Basic $ 1.08 $ .89 $ .76 $ .65
Diluted 1.07 .88 .75 .65
Net earnings
Basic 1.03 .89 .76 .65
Diluted 1.02 .88 .75 .65
Dividends declared .25 .24 .22 .20
Book value 5.72 4.81 4.15 3.64
Non-Current Liabilities
Long-term debt $ 14 $ 3 $ 4 $ 2
Deferred income taxes 89 113 145 142
Other non-current liabilities 370 279 260 238
Assets and Equity
Total assets $ 4,902 $ 4,207 $ 3,634 $ 3,253
Shareholders' equity $ 2,849 $ 2,373 $ 2,043 $ 1,793
Return on average shareholders'
equity 19.6% 19.8% 19.4% 19.1%
<FN>
(1) Fiscal 1998 includes a pre-tax gain of $37 million ($23 million after-tax
or $.05 per share) from the sale of the company's long-term care pharmacy
business.
(2) Fiscal 1998 includes the $26 million ($.05 per share) charge from the
cumulative effect of accounting change for system development costs.
Fiscal 1993 includes the $24 million ($.05 per share) costs from the
cumulative effect of accounting changes for postretirement benefits and
income taxes.
(3) Per share data have been adjusted for two-for-one stock splits in 1997, 1995
and 1991.
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C>
$ 9,235 $8,295 $7,475 $6,733 $6,047 $5,380 $4,884
6,615 5,959 5,378 4,829 4,356 3,849 3,469
2,165 1,930 1,739 1,583 1,407 1,278 1,190
(3) 7 5 9 3 9 16
8,777 7,896 7,122 6,421 5,766 5,136 4,675
458 399 353 312 281 244 209
176 154 132 117 106 90 80
282 245 221 195 175 154 129
- (24) - - - - -
$ 282 $ 221 $ 221 $ 195 $ 175 $ 154 $ 129
$ .57 $ .50 $ .45 $ .40 $ .35 $ .31 $ .26
.57 .50 .45 .39 .35 .31 .26
.57 .45 .45 .40 .35 .31 .26
.57 .45 .45 .39 .35 .31 .26
.17 .15 .13 .12 .10 .09 .08
3.20 2.80 2.51 2.20 1.92 1.67 1.45
$ 2 $ 6 $ 19 $ 123 $ 147 $ 150 $ 172
138 144 172 155 139 118 106
214 176 104 85 77 69 55
$2,873 $2,506 $2,347 $2,074 $1,896 $1,666 $1,501
$1,574 $1,379 $1,233 $1,081 $ 947 $ 823 $ 713
19.1% 18.8% 19.1% 19.2% 19.7% 20.1% 19.3%
_____________________________________________________________________________
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Fiscal 1998 was the twenty-fourth consecutive year of record sales and earnings.
Net earnings were $511 million or $1.02 per share (diluted), an increase of
17.2% from last year's earnings of $436 million or $.88 per share. Included in
this year's results was a $26 million after-tax charge ($.05 per share) related
to an accounting change and an offsetting $.05 per share gain on the sale of the
company's long-term care pharmacy business which was recorded in the fiscal
fourth quarter. The accounting change involved expensing the cumulative cost of
business process reengineering activities that had been capitalized as part of
system development projects. Operating earnings increases resulted from higher
sales and improved expense ratios.
[BAR GRAPH] S,G&A 1996-1998
(as a percent to sales)
1996 1997 1998
22.6% 22.2% 21.8%
Total net sales increased by 14.5% to $15.3 billion in fiscal 1998 compared
to increases of 13.5% in 1997 and 13.3% in 1996. 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 9.4% in 1998,
8.1% in 1997, and 8.5% in 1996. New store openings accounted for 10.4% of the
sales gains in 1998, 8.6% in 1997, and 7.6% in 1996. The company operated 2,549
drugstores as of August 31, 1998, compared to 2,358 a year earlier.
Prescription sales increased 20.6% in 1998, 18.1% in 1997, and 18.0% in
1996. Comparable drugstores were up 15.6% in 1998 and 13.0% in 1997 and 1996.
Prescription sales were 49.6% of total sales for fiscal 1998 compared to 47.1%
in 1997 and 45.2% in 1996. 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 to 27.2% of sales from 27.5%
last year and 27.7% in fiscal 1996. The two major factors contributing to the
decrease were the decline in pharmacy gross profit margins and the 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 last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were 2.15% in 1998, .82% in 1997,
and .68% in 1996, which resulted in charges to cost of sales of $47 million in
1998, $16 million in 1997, and $13 million in 1996. Inflation on prescription
inventory was 5.5% in 1998, 1.9% in 1997, and 2.3% in 1996.
Selling, occupancy and administration expenses were 21.8% of sales in fiscal
1998, 22.2% of sales in fiscal 1997, and 22.6% of sales in fiscal 1996. The
fiscal 1998 decrease, as a percent to sales, was caused by lower payroll,
advertising and headquarters expenses. The fiscal 1997 decrease, as a percent
to sales, was caused principally by lower advertising expenses. The growth in
mail order pharmacy, which has a lower expense ratio, has also been contributing
to the decreases.
Interest income was relatively constant over the three year periods.
Average net investment levels were approximately $72 million in 1998, $79
million in 1997, and $76 million in 1996.
The fiscal 1998, 1997 and 1996 effective tax rates were 38.75%.
Financial Condition
Cash and cash equivalents were $144 million at August 31, 1998, compared to
$73 million at August 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 fiscal 1998 was $571 million
compared to $650 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 $502 million in fiscal 1998 and
$486 million in 1997. Additions to property and equipment were $641 million
compared to $485 million last year. During the year, 304 new or relocated
drugstores were opened. This compares to 251 new or relocated drugstores opened
in the same period last year. New stores are owned or leased. There were 136
owned locations opened during the year or under construction at August 31, 1998
versus 110 for the same period last year. The surrender of certain corporate-
owned life insurance policies resulted in net proceeds of $58 million. Property
and equipment dispositions of $72 million in fiscal 1998 includes the proceeds
from the sale of the company's 14 long-term care pharmacy facilities.
[PIE CHART] Capital Expenditures-FY 1999
More than $750 million to be spent
-Stores (67%)
-Distribution (21%)
-Technology (10%)
-Other (2%)
Capital expenditures for fiscal 1999 are estimated to be more than $750
million. The company expects to open at least 365 new stores in fiscal 1999.
The company is continuing to relocate stores to more convenient and profitable
freestanding locations. Expectations are that 3,000 drugstores will be
operating in the year 2000, with a goal of 6,000 by 2010. This may necessitate
future long-term borrowings.
Net cash provided by financing activities was $2 million compared to $100
million used a year ago. The company issued 4.5 million shares of authorized
but previously unissued shares to satisfy various stock option and purchase plan
requirements. This avoided purchasing shares on the open market which would
have resulted in cash outflows of approximately $111 million. At August 31,
1998, the company had $162 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 and hardware modifications
or replacements to enable transactions to process properly in the year 2000.
Included in the hardware review is an examination of critical non-IT systems,
including embedded technology at company facilities. Left uncorrected, the
"year 2000 problem" could result in business interruptions. However, based on
currently available information, all necessary changes are expected to occur in
a timely manner. As part of the project, a detailed work plan was developed to
identify key processes such as point-of-sale, pharmacy and inventory control.
At August 31, 1998, it is estimated that 70% of the work plan activities have
been completed and approximately 50% of the costs have been incurred. The total
cost of these changes is expected to be approximately $10 million which is based
on management's best estimates and subject to change 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 or any failure by other parties to achieve year 2000 compliance.
The company is developing contingency plans which identify "risk points" within
key business processes and is developing alternative solutions if a failure
occurs at a risk point. Any unexpected problems which occur concerning this
issue will be attacked vigorously and, if necessary, workarounds will be
pursued.
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 pronouncement requires that costs related to
start-up activities be expensed as incurred. The company's policies are in
compliance with this pronouncement, and therefore, no adjustments are necessary.
Cautionary Note Regarding Forward-looking Statements
Certain statements and projections of future results made in this report
constitute forward-looking information that is based on current market,
competitive and regulatory expectations and involve risks and uncertainties.
Please see Walgreen Co.'s Form 10-K for the period ended August 31, 1998, for a
discussion of certain important factors as they relate to forward-looking
statements. Actual results could differ materially.
Consolidated Statements of Earnings and Shareholders' Equity
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1998, 1997 and 1996
(Dollars in Millions, except per share data)
_______________________________________________________________________________
Earnings 1998 1997 1996
Net Sales $15,307 $13,363 $11,778
Costs and Deductions
Cost of sales 11,140 9,682 8,515
Selling, occupancy and administration 3,332 2,973 2,659
14,472 12,655 11,174
Other (Income) Expense
Interest income (6) (6) (5)
Interest expense 1 2 2
Gain on sale of long-term care pharmacies (37) - -
(42) (4) (3)
Earnings
Earnings before income tax provision
and cumulative effect of accounting change 877 712 607
Income tax provision 340 276 235
Earnings before cumulative effect of
accounting change 537 436 372
Cumulative effect of accounting change
for system development costs (26) - -
Net Earnings $ 511 $ 436 $ 372
_______________________________________________________________________________
Net Earnings per Common Share
Basic
Earnings before cumulative effect of
accounting change $ 1.08 $ .89 $ .76
Cumulative effect of accounting change
for system development costs (.05) - -
Net Earnings $ 1.03 $ .89 $ .76
Diluted
Earnings before cumulative effect of
accounting change $ 1.07 $ .88 $ .75
Cumulative effect of accounting change
for system development costs (.05) - -
Net Earnings $ 1.02 $ .88 $ .75
Average shares outstanding 496,084,620 492,440,738 492,282,144
Dilutive effect of stock options 6,761,836 5,893,807 4,589,866
Average shares outstanding assuming dilution 502,846,456 498,334,545 496,872,010
Common Stock Paid-in Retained
Shareholders' Equity Shares Amount Capital Earnings
Balance, August 31, 1995 492,282,144 $ 77 $ - $ 1,716
Net earnings - - - 372
Cash dividends declared ($.22 per share) - - - (109)
Employee stock purchase and option plans - - - (13)
Balance, August 31, 1996 492,282,144 77 - 1,966
Net earnings - - - 436
Cash dividends declared ($.24 per share) - - - (118)
Employee stock purchase and option plans 1,507,822 - 30 (18)
Balance, August 31, 1997 493,789,966 77 30 2,266
Net earnings - - - 511
Cash dividends declared ($.25 per share) - - - (124)
Employee stock purchase and option plans 4,453,556 1 88 -
Balance, August 31, 1998 498,243,522 $ 78 $ 118 $ 2,653
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
Consolidated Balance Sheets
Walgreen Co. and Subsidiaries
At August 31, 1998 and 1997
(Dollars in Millions)
________________________________________________________________________________
Assets 1998 1997
Current Assets
Cash and cash equivalents $ 144 $ 73
Accounts receivable, net 373 376
Inventories 2,027 1,733
Other current assets 79 144
Total Current Assets 2,623 2,326
Non-Current Assets
Property and equipment, at cost, less accumulated
depreciation and amortization 2,144 1,754
Other non-current assets 135 127
Total Assets $ 4,902 $ 4,207
________________________________________________________________________________
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $ 907 $ 813
Accrued expenses and other liabilities 618 554
Income taxes 55 72
Total Current Liabilities 1,580 1,439
Non-Current Liabilities
Deferred income taxes 89 113
Other non-current liabilities 384 282
Total Non-Current Liabilities 473 395
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 498,243,522 in 1998
and 493,789,966 in 1997 78 77
Paid-in capital 118 30
Retained earnings 2,653 2,266
Total Shareholders' Equity 2,849 2,373
Total Liabilities and Shareholders' Equity $ 4,902 $ 4,207
________________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
Consolidated Statements of Cash Flows
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1998, 1997 and 1996
(Dollars in Millions)
_______________________________________________________________________________
Fiscal Year 1998 1997 1996
Cash Flows from Operating Activities
Net earnings $ 511 $ 436 $ 372
Adjustments to reconcile net earnings to net
cash provided by operating activities -
Cumulative effect of accounting
change for system development costs 26 - -
Depreciation and amortization 189 164 147
Gain on sale of long-term care pharmacies (37) - -
Deferred income taxes (1) 8 3
Other 29 8 5
Changes in operating assets and
liabilities -
Inventories (299) (101) (178)
Accrued expenses and other liabilities 99 73 42
Trade accounts payable 94 121 85
Accounts receivable, net (20) (74) (60)
Income taxes (17) 12 (9)
Other (3) 3 4
Net cash provided by operating activities 571 650 411
Cash Flows from Investing Activities
Additions to property and equipment (641) (485) (364)
Disposition of property and equipment 72 15 18
Proceeds from the surrender of corporate-
owned life insurance 58 - -
Net borrowing from (investment in)
corporate-owned life insurance 9 (16) 47
Net cash used for investing activities (502) (486) (299)
Cash Flows from Financing Activities
Cash dividends paid (123) (116) (105)
Proceeds from (purchases for) employee
stock plans 105 17 (20)
Other 20 (1) -
Net cash provided by (used for) financing
activities 2 (100) (125)
Changes in Cash and Cash Equivalents
Net increase (decrease) in cash and
cash equivalents 71 64 (13)
Cash and cash equivalents at
beginning of year 73 9 22
Cash and cash equivalents at
end of year $ 144 $ 73 $ 9
_______________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
Statement of Major Accounting Policies
Description of Business
The company is principally in the retail drugstore business. Stores are located
in 35 states and Puerto Rico. At August 31, 1998, there were 2,547 retail
drugstores and two mail service facilities. Prescription sales were 49.6% of
total sales for fiscal 1998 compared to 47.1% in 1997 and 45.2% in 1996.
Accounting Change
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 pre-tax
charge of $43 million, or $.05 per share, recorded in the quarter ended November
30, 1997. No restatement of prior years' financial statements was required.
Except for the cumulative effect of the accounting change, the effect of this
change on the current year and prior years is not material.
Basis of Presentation
The consolidated statements include the accounts of the company and its
subsidiaries. All significant intercompany transactions have been eliminated.
The financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's prudent
judgments and estimates. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments
with an original maturity of three months or less. The company's cash
management policy provides for the bank disbursement accounts to be reimbursed
on a daily basis. Checks issued but not presented to the banks for payment of
$148 million and $145 million at August 31, 1998 and 1997, respectively, are
included in cash and cash equivalents as reductions of other cash balances.
Financial Instruments
The company had approximately $53 million and $38 million of outstanding letters
of credit at August 31, 1998 and 1997, respectively, which guaranteed foreign
trade purchases. Additional outstanding letters of credit of $41 million and
$59 million at August 31, 1998 and 1997, respectively, guaranteed payments of
casualty claims. The casualty claim letters of credit are annually renewable
and will remain in place until the casualty claims are paid in full. The
company pays a nominal facility fee to the financing bank to keep this line of
credit facility active. The company also had purchase commitments of
approximately $242 million and $209 million at August 31, 1998 and 1997,
respectively, related to the purchase of store locations. There were no
investments in derivative financial instruments during fiscal 1998 and 1997.
Inventories
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market
basis. At August 31, 1998 and 1997, inventories would have been greater by
$491 million and $444 million, respectively, if they had been valued on a lower
of first-in, first-out (FIFO) cost or market basis. Cost of sales is primarily
derived from an estimate based upon point-of-sale scanning information and
adjusted based on periodic inventories.
Property and Equipment
Depreciation is provided on a straight-line basis over the estimated useful
lives of owned assets. Leasehold improvements and leased properties under
capital leases are amortized over the estimated physical life of the property or
over the term of the lease, whichever is shorter. Estimated useful lives range
from 12 1/2 to 39 years for land improvements, buildings and building
improvements and 5 to 12 1/2 years for equipment. Major repairs which extend
the useful life of an asset are capitalized in the property and equipment
accounts. Routine maintenance and repairs are charged against earnings. The
composite method of depreciation is used for equipment; therefore, gains and
losses on retirement or other disposition of such assets are included in
earnings only when an operating location is closed, completely remodeled or
impaired resulting in the carrying amount not being recoverable. Undiscounted
future cash flows are used to determine if impairment has occurred. Impaired
amounts are determined by comparing the present value of estimated future cash
flows to the carrying value of their assets. Fully depreciated property and
equipment are removed from the cost and related accumulated depreciation and
amortization accounts.
Property and equipment consists of (In Millions):
1998 1997
Land and land improvements
Owned stores $ 360 $ 217
Distribution centers 21 19
Other locations 9 9
Buildings and building improvements
Leased stores (leasehold improvements only) 404 337
Owned stores 346 261
Distribution centers 159 117
Other locations 45 41
Equipment
Stores 908 783
Distribution centers 187 162
Other locations 384 383
Capitalized system development costs 123 154
Capital lease properties 15 19
2,961 2,502
Less: accumulated depreciation and amortization 817 748
$ 2,144 $ 1,754
The company capitalizes costs which primarily relate to the application
development stage of significant internally developed software. These costs
principally relate to Intercom Plus, a pharmacy computer and workflow system,
and SIMS inventory management system. These costs are amortized over a five-
year period as phases of these systems are implemented. Unamortized costs as of
August 31, 1998 and 1997, were $53 million and $97 million, respectively.
Amortization of these costs were $13 million in 1998, $14 million in 1997 and
$11 million in 1996.
Income Taxes
The company provides for federal and state income taxes on items included in the
Consolidated Statements of Earnings regardless of the period when such taxes are
payable. Deferred taxes are recognized for temporary differences between
financial and income tax reporting based on enacted tax laws and rates.
Retirement Benefits
The principal retirement plan for employees is the Walgreen Profit-Sharing
Retirement Trust, to which both the company and the employees contribute. The
company's contribution, which is determined annually at the discretion of the
Board of Directors, has historically related to pre-tax income. The
profit-sharing provision was $79 million in 1998, $59 million in 1997 and
$50 million in 1996.
The company provides certain health and life insurance benefits for retired
employees who meet eligibility requirements, including age and years of service.
The costs of these benefits are accrued over the period earned. The company's
postretirement benefit plans currently are not funded.
Insurance
The company obtains insurance coverage for catastrophic exposures as well as
those risks required to be insured by law. It is the company's policy to retain
a significant portion of certain losses related to worker's compensation,
property losses, business interruptions relating from such losses and
comprehensive general, pharmacist and vehicle liability. Provisions for these
losses are recorded based upon the company's estimates for claims incurred.
Such estimates utilize certain assumptions followed in the insurance industry.
Net Earnings Per Common Share
Financial Accounting Standards Board(FASB) 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.
Pre-Opening Expenses
Non-capital expenditures incurred prior to the opening of a new or remodeled
store are charged against earnings when they are incurred.
Advertising Costs
Advertising costs are expensed as incurred, and were $60 million in 1998,
$68 million in 1997 and $82 million in 1996.
Notes to Consolidated Financial Statements
Interest Expense
The company capitalized $2 million of interest expense as part of
significant construction projects during fiscal 1998 and less than $1 million
during fiscal 1997 and 1996. Interest paid, net of amounts capitalized, was $1
million in 1998, $2 million in 1997 and $3 million in 1996.
Gain on Sale of Long-Term Care Pharmacies
In June 1998, the company completed the sale of its long-term care pharmacy
business for a pre-tax gain of $37 million ($23 million after-tax or $.05 per
share). The 14 units generated revenues of approximately $40 million a year.
Leases
Although some locations are owned, the company generally operates in leased
premises. Original non-cancelable lease terms typically are 20 years and may
contain escalation clauses, along with options that permit renewals for
additional periods. The total amount of the minimum rent is expensed on a
straight-line basis over the term of the lease. In addition to minimum fixed
rentals, most leases provide for contingent rentals based upon sales.
Minimum rental commitments at August 31, 1998, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Millions):
Year
1999 $ 441
2000 473
2001 460
2002 446
2003 432
Later 4,772
Total minimum lease payments $7,024
The above minimum lease payments include minimum rental commitments related to
capital leases amounting to $8 million at August 31, 1998. The present value
of net minimum capital lease payments, due after 1999, are reflected in the
accompanying Consolidated Balance Sheets as part of other non-current
liabilities. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately $21 million on leases due in the future under
non-cancelable subleases.
Rental expense was as follows (In Millions):
1998 1997 1996
Minimum rentals $ 406 $ 357 $ 318
Contingent rentals 35 35 36
Less: Sublease rental income (4) (3) (3)
$ 437 $ 389 $ 351
Income Taxes
The provision for income taxes consists of the following (In Millions):
1998 1997 1996
Current provision -
Federal $ 290 $ 228 $ 196
State 51 40 36
341 268 232
Deferred provision -
Federal (2) 7 3
State 1 1 -
(1) 8 3
$ 340 $ 276 $ 235
The components of the deferred provision were (In Millions):
1998 1997 1996
Accelerated depreciation $ 22 $ 9 $ 12
Employee benefit plans (10) (14) (15)
Inventory (3) 22 1
Other (10) (9) 5
$ (1) $ 8 $ 3
The deferred tax assets and liabilities included in the Consolidated Balance
Sheets consist of the following (In Millions):
1998 1997
Deferred tax assets -
Employee benefit plans $ 105 $ 95
Insurance 39 41
Accrued rent 41 35
Inventory 16 15
Other 44 28
245 214
Deferred tax liabilities -
Accelerated depreciation 231 225
Inventory 53 55
Other 19 9
303 289
Net deferred tax liabilities $ 58 $ 75
Income taxes paid were $333 million, $243 million and $241 million during the
fiscal years ended August 31, 1998, 1997 and 1996, respectively. The difference
between the statutory income tax rate and the effective tax rate is principally
due to state income tax provisions.
Short-Term Borrowings
The company obtained funds through the placement of commercial paper, as
follows (Dollars in Millions):
1998 1997 1996
Average outstanding during the year $ 18 $ 8 $ 19
Largest month-end balance 50 42 77
(Oct) (Sept) (Nov)
Weighted average interest rate 5.7% 5.4% 5.8%
There were no short-term borrowings at August 31, 1998 or August 31, 1997. At
August 31, 1998 the company had approximately $162 million of available bank
lines of credit. The credit lines are renewable annually at various dates and
provide for loans of varying maturities at the prime rate. There are no
compensating balance arrangements.
Contingencies
The company is involved in various legal proceedings incidental to the normal
course of business. Company management is of the opinion, based upon the advice
of General Counsel, that although the outcome of such litigation cannot be
forecast with certainty, the final disposition should not have a material
adverse effect on the company's consolidated financial position or results of
operations.
Capital Stock
The company's common stock is subject to a Rights Agreement under which each
share has attached to it a Right to purchase one one-hundredth of a share of a
new series of Preferred Stock, at a price of $75.00 per Right, In the event an
entity acquires or attempts to acquire 15% of the then outstanding shares, each
Right, except those of an acquiring entity, would entitle the holder to purchase
a number of shares of common stock pursuant to a formula contained in the
Agreement. These non-voting Rights will expire on August 21, 2006, but may be
redeemed at a price of $.005 per Right at any time prior to a public
announcement that the above event has occurred.
As of August 31, 1998, 57,364,515 shares of common stock were reserved for
future stock issuances under the company's employee stock purchase, option and
award plans. Preferred stock of 4,982,435 shares have been reserved for
issuance upon the exercise of Preferred Share Purchase Rights.
Stock Compensation Plans
The Walgreen Co. Executive Stock Option Plan provides for the granting to key
employees of options to purchase company common stock over a 10-year period, at
a price not less than the fair market value on the date of the grant. Under
this Plan, options may be granted until October 9, 2006, for an aggregate of
19,200,000 shares of common stock of the company. The options granted during
fiscal 1998, 1997 and 1996 have a minimum three-year holding period.
The Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) provides for
the granting of options to purchase company common stock over a period of 10
years to eligible employees upon the purchase of company shares subject to
certain restrictions. Under the terms of the Plan, the option price cannot be
less than 85% of the fair market value at the date of grant. Compensation
expense related to the Plan was less than $1 million in fiscal 1998, 1997 and
1996. Options may be granted under this Plan until September 30, 2002, for an
aggregate of 20,000,000 shares of common stock of the company. The options
granted during fiscal 1998, 1997 and 1996 have a two-year holding period.
A summary of information relative to the company's stock option plans follows:
Options Outstanding Options Exercisable
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
August 31, 1995 14,955,620 $ 8.36
Granted 299,136 12.95
Exercised (758,300) 7.69
Canceled/Forfeited (42,848) 9.63
August 31, 1996 14,453,608 $ 8.49 10,741,596 $ 8.04
Granted 4,706,936 17.97
Exercised (2,233,992) 6.26
Canceled/Forfeited (143,636) 13.00
August 31, 1997 16,782,916 $11.40 9,874,942 $ 8.65
Granted 986,081 28.04
Exercised (2,833,841) 7.55
Canceled/Forfeited (132,178) 17.08
August 31, 1998 14,802,978 $13.18 9,127,669 $ 9.24
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 8/31/98 Life Price at 8/31/98 Price
$ 3 to 7 804,093 1.98 yrs. $ 5.99 804,093 $ 5.99
8 to 16 9,563,130 5.38 10.38 8,323,576 9.56
17 to 37 4,435,755 8.38 20.53 - -
$ 3 to 37 14,802,978 6.09 yrs. $13.18 9,127,669 $ 9.24
Under the Walgreen Co. 1982 Employees Stock Purchase Plan, eligible employees
may purchase company stock at 90% of the fair market value at the date of
purchase. Employees may purchase shares through cash purchases, loans or
payroll deductions up to certain limits. The aggregate number of shares for
which all participants have the right to purchase under this Plan is 32,000,000.
The Walgreen Co. Restricted Performance Share Plan provides for the
granting of up to 16,000,000 shares of common stock to certain key employees,
subject to restrictions as to continuous employment except in the case of death,
normal retirement and total and permanent disability. Restrictions generally
lapse over a four-year period from the date of grant. Compensation expense is
recognized in the year of grant. Compensation expense related to the Plan was
$5 million in both fiscal 1998 and 1997, and $4 million in fiscal 1996. The
number of shares granted was 65,175 in fiscal 1998, 108,676 in fiscal 1997 and
129,456 in 1996.
The company applies Accounting Principles Board(APB) Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized based on the fair value of its grants
under these plans. Had compensation costs been determined consistent with the
method of FASB Statement No. 123 for options granted in fiscal 1998, 1997 and
1996, pro forma net earnings and net earnings per common share would have been
as follows (In Millions, except per share data):
1998 1997 1996
Net earnings
As reported $ 511 $ 436 $ 372
Pro forma 497 423 369
Net earnings per common share - Basic
As reported 1.03 .89 .76
Pro forma 1.00 .86 .75
Net earnings per common chare - Diluted
As reported 1.02 .88 .75
Pro forma .99 .85 .74
The weighted-average fair value and exercise price of options granted for fiscal
1998, 1997 and 1996 were as follows:
1998 1997 1996
Granted at market price -
Weighted-average fair value $10.54 $ 6.65 $ 4.72
Weighted-average exercise price 28.16 16.51 12.34
Granted below market price -
Weighted-average fair value 9.62 6.95 5.11
Weighted-average exercise price 27.65 18.40 13.95
The fair value of each option grant used in the pro forma net earnings and net
earnings per share was determined using the Black-Scholes option pricing model
with weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996:
1998 1997 1996
Risk-free interest rate 6.19% 6.29% 5.99%
Average life of option (years) 7 6 6
Volatility 20.39% 20.00% 19.94%
Dividend yield .53% 1.07% 1.07%
Postretirement Healthcare Benefits
The components of the postretirement healthcare benefits costs for the last
three fiscal years were as follows (In Millions):
1998 1997 1996
Service cost $ 4 $ 4 $ 4
Interest cost 7 6 6
Total postretirement healthcare benefits costs $11 $10 $10
The company's unfunded accumulated postretirement healthcare benefit
liabilities at August 31, included in the Consolidated Balance Sheets, were as
follows (In Millions):
1998 1997
Retirees $ 27 $ 23
Fully eligible active plan participants 15 12
Other active plan participants 64 54
Accumulated postretirement benefit obligation 106 89
Unrecognized actuarial loss (10) (1)
Accrued postretirement benefit liability $ 96 $ 88
The accumulated postretirement healthcare benefit obligation was determined
assuming the discount rate was 7.0% and the healthcare cost trend rate was
7.0% for 1998 with a gradual decline over a six-year period to 5.0%. These
trend rates reflect the company's prior experience and management's expectation
that future rates will decline. The effect of a 1% increase each year in the
projected healthcare cost trend rate would increase the accumulated
postretirement benefit obligation at August 31, 1998, by $21 million and the
service and interest cost components of the fiscal 1998 net periodic
postretirement benefit cost by $3 million. The unrecognized actuarial amount is
being amortized over the average remaining service period of active plan
participants.
Supplementary Financial Information
Included in the Consolidated Balance Sheets captions are the following assets
and liabilities (In Millions):
1998 1997
Accounts receivable -
Accounts receivable $ 384 $ 389
Allowances for doubtful accounts (11) (13)
$ 373 $ 376
Accrued expenses and other liabilities -
Accrued salaries $ 196 $ 164
Taxes other than income taxes 85 82
Profit sharing 99 92
Other 238 216
$ 618 $ 554
Summary of Quarterly Results (Unaudited)
(Dollars in Millions, except per share data)
----------------Quarter Ended--------------
Fiscal
November February May August Year
Fiscal 1998
Net sales $ 3,485 $ 4,094 $ 3,887 $ 3,841 $ 15,307
Gross profit 944 1,133 1,047 1,043 4,167
Earnings before
cumulative
effect of
accounting
change 87 171 127 152 537
Net Earnings 61 171 127 152 511
Per Common Share -
Basic
Earnings before
cumulative effect
of accounting
change $ .18 $ .34 $ .26 $ .30 $ 1.08
Net Earnings .13 .34 .26 .30 1.03
Diluted
Earnings before
cumulative effect
of accounting
change .18 .34 .25 .30 1.07
Net Earnings .13 .34 .25 .30 1.02
Fiscal 1997
Net sales $ 3,054 $ 3,603 $ 3,403 $ 3,303 $ 13,363
Gross profit 830 1,006 933 912 3,681
Net earnings 75 147 108 106 436
Per Common Share -
Basic $ .15 $ .30 $ .22 $ .22 $ .89
Diluted .15 .30 .21 .22 .88
Comments on Quarterly Results
The quarter ended August 31, 1998, includes the pre-tax gain of $37 million ($23
million after-tax or $.05 per share) from the sale of the company's long-term
care pharmacy business.
Common Stock Prices
Below are the New York Stock Exchange high and low for each quarter of fiscal
1998 and 1997.
________________Quarter Ended________________
Fiscal
November February May August Year
Fiscal 1998 High $32 3/4 $37 1/8 $36 9/16 $48 15/16 $48 15/16
Low 25 5/8 28 1/4 32 7/8 36 3/16 25 5/8
Fiscal 1997 High $21 7/16 $21 13/16 $23 5/8 $29 5/8 $29 5/8
Low 16 1/2 19 7/16 20 9/16 23 5/16 16 1/2
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Walgreen Co.:
We have audited the accompanying consolidated balance sheets of Walgreen
Co. (an Illinois corporation) and Subsidiaries as of August 31, 1998 and
1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended
August 31, 1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Walgreen Co.
and Subsidiaries as of August 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois,
September 25, 1998
Management's Report
The primary responsibility for the integrity and objectivity of the consolidated
financial statements and related financial data rests with the management of
Walgreen Co. The financial statements were prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and
included amounts that were based on management's most prudent judgments and
estimates relating to matters not concluded by fiscal year-end. Management
believes that all material uncertainties have been either appropriately
accounted for or disclosed. All other financial information included in this
annual report is consistent with the financial statements.
The firm of Arthur Andersen LLP, independent public accountants, was
engaged to render a professional opinion on Walgreen Co.'s consolidated
financial statements. Their report contains an opinion based on their audit,
which was made in accordance with generally accepted auditing standards and
procedures, which they believed were sufficient to provide reasonable assurance
that the consolidated financial statements, considered in their entirety, are
not misleading and do not contain material errors.
Three outside members of the Board of Directors constitute the company's
Audit Committee, which meets at least quarterly and is responsible for reviewing
and monitoring the company's financial and accounting practices. Arthur
Andersen LLP and the company's General Auditor meet alone with the Audit
Committee, which also meets with the company's management to discuss financial
matters, auditing and internal accounting controls.
The company's systems are designed to provide an effective system of
internal accounting controls to obtain reasonable assurance at reasonable cost
that assets are safeguarded from material loss or unauthorized use and
transactions are executed in accordance with management's authorization and
properly recorded. To this end, management maintains an internal control
environment which is shaped by established operating policies and procedures, an
appropriate division of responsibility at all organizational levels, and a
corporate ethics policy which is monitored annually. The company also has an
Internal Control Evaluation Committee, composed primarily of senior management
from the Accounting and Auditing Departments, which oversees the evaluation of
internal controls on a company-wide basis. Management believes it has
appropriately responded to the internal auditors' and independent public
accountants' recommendations concerning the company's internal control system.
/s/ L. D. Jorndt /s/ W. M. Rudolphsen
President Controller
and Chief Executive Officer and Chief Accounting Officer
/s/ R. L. Polark
Senior Vice President
and Chief Financial Officer
Walgreens Nationwide
State 1998 1997 State 1998 1997
Alabama 1 0
Arizona 137 134 Nevada 16 11
Arkansas 9 9 New Hampshire 9 9
California 196 168 New Jersey 40 38
Colorado 53 53 New Mexico 40 37
Connecticut 32 32 New York 34 30
Florida 412 395 North Dakota 1 1
Illinois 345 330 Ohio 76 61
Indiana 103 100 Oklahoma 26 22
Iowa 33 31 Oregon 12 5
Kansas 20 17 Pennsylvania 7 5
Kentucky 39 39 Rhode Island 14 12
Louisiana 55 49 Tennessee 85 81
Massachusetts 73 72 Texas 261 234
Michigan 40 28 Virginia 12 5
Minnesota 64 62 Washington 22 19
Mississippi 7 5 Wisconsin 119 115
Missouri 82 75 Puerto Rico 44 45
Nebraska 30 29 Total 2,549 2,358
Information is provided as of fiscal year-end.
EXHIBIT 21
Subsidiaries of the Registrant
There are no parents of the Registrant, Walgreen Co. (an Illinois
corporation). The following subsidiaries are wholly owned by the
Registrant, 12 of which are engaged in the operation of retail drug stores,
one, Walgreens Healthcare Plus, Inc., in mail order drug operations, one, WHP
Health Initiatives, Inc., in pharmacy benefit management and one, Walgreen
Advance Care, Inc., in retailing of health care maintenance services.
STATE, COMMONWEALTH OR
NAME COUNTRY OF INCORPORATION
Walgreen Arizona Drug Co. Arizona
Bond Drug Company of Clinton Delaware
Bond Drug Company of Illinois Illinois
Walgreens Advance Care, Inc. Illinois
Walgreens Healthcare Plus, Inc. Illinois
WHP Health Initiatives, Inc. Illinois
Walgreen Louisiana Co., Inc. Louisiana
Walgreen Columbus Co. Nebraska
Walgreen Fremont Co. Nebraska
Walgreen Hastings Co. Nebraska
Walgreen Kearney Co. Nebraska
Walgreen Lincoln Co. Nebraska
Walgreen Eastern Co., Inc. New York
Walgreen of Puerto Rico, Inc. Puerto Rico
Walgreen of San Patricio, Inc. Puerto Rico
In addition to the above named subsidiaries, the Registrant wholly owns 5
subsidiaries engaged in service or real estate operations, and 20
inactive subsidiaries. These 25 subsidiaries, considered in the
aggregate as a single subsidiary, would not constitute a significant
subsidiary.
All wholly owned subsidiaries are included in the consolidated financial
statements.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated September 25, 1998 included or incorporated by reference in this
Form 10-K, into the Company's previously filed Registration Statements File No.
2-79977, File No. 2-79978, File No. 33-5903 and File No. 33-49676.
/s/Arthur Andersen LLP
Chicago, Illinois
November 25, 1998
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IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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