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, 1999.
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 ($.078125 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 29, 1999, there were 1,004,943,879 shares of Walgreen Co.
common stock, par value $.078125 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
$24,846,352,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended August 31,
1999, 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 1999 annual meeting of shareholders to be held January
12, 2000, 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, 1999, had net sales of
$17.8 billion. The company served customers in 39 states and Puerto Rico
through 2,819 retail drugstores and 2 mail service facilities.
In fiscal 1999, the company opened 386 new or relocated drugstores,
completed remodelings of 33 units, and closed 114 drugstores. In the last five
fiscal years, the company has opened 1356 new drugstores, 1 new mail service
facility, completed remodelings of 281 units and closed 503 drugstores and one
mail service facility. In addition, one major distribution center was added
during the five-year period.
Prescription sales were 52.4% of total sales for fiscal 1999 compared to
49.6% in 1998 and 47.1% in 1997. 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 450 new stores in fiscal 2000 and have a total
of 6,000 drugstores by the year 2010. By the end of calendar 2000, stores will
be added in four more states - Georgia, Maryland, Utah and Wyoming. The company
launched a new full-service internet pharmacy early in fiscal 2000 and plans to
open or expand one distribution center a year for the next five years.
(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. Customer
prescription purchases can be made at the drugstores as well
as through the mail, telephone and the internet.
The estimated contributions of various product classes to
sales for each of the last three fiscal years are as follows:
Percentage
Product Class 1999 1998 1997
Prescription Drugs 52% 50% 47%
Nonprescription Drugs * 12 12 13
Cosmetics, Toiletries * 8 8 8
General Merchandise * 28 30 32
Total Sales 100% 100% 100%
* Estimates based, in part, on store scanning information.
(ii) Status of a product or segment.
Not applicable.
1
(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,
1999 ("Annual Report"), which is incorporated herein by reference.
(vi) Working capital practices.
The company generally finances its inventory and expansion
needs with internally generated funds. During fiscal 1999 the
company obtained funds through the placement of commercial paper.
Short-term borrowings are also anticipated in fiscal 2000
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, over 80% of prescription
sales are now paid by a third party versus cash at the pharmacy
counter. Customer returns are immaterial.
(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 sales. Approximately 7% of
consolidated sales are to PCS Health Systems, Inc., a pharmacy
benefits manager and wholly owned subsidiary of Rite Aid
Corporation.
(viii)Backlog Orders.
Not applicable.
2
(ix) Government contracts.
The company fills prescriptions for many state welfare plans.
Revenues from all such plans are less than 5% of total sales.
(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, internet
pharmacies, 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 1999 were as follows:
Percent
State of Sales
Florida 19%
Illinois 14
Texas 9
Arizona 7
California 6
Wisconsin 4
33 other states and Puerto Rico 41
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 107,000 persons, about
36,000 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, our web site, 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, 1999, 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, on-line retailers, other retailers
and mail order companies; changes in state or federal legislation or
regulations; the efforts of third party payers to reduce prescription drug
costs; the success of planned advertising and merchandising strategies; the
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 "Simply Everywhere" 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 14% of the retail stores open at August 31, 1999. 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 26.0 million square feet at August 31, 1998, to 29.2 million
square feet at August 31, 1999. 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 4,100,000 square feet of
space, of which 3,500,000 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 plans to open or expand one distribution
center a year for the next five years.
There are five principal office facilities containing approximately 600,000
square feet of which 400,000 square feet is owned and the remainder is leased.
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
160,000 square feet. In September 1999 the company began operations in a 16,000
square foot owned mail service facility located in Beaverton, Oregon. The mail
order and office facilities are adequate for current needs.
4
Item 3. Legal Proceedings
The following cases relating to partially filled prescriptions were
previously reported in the company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1998: 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; 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; and 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. On September 14, 1999, the company settled these and
other governmental actions relating to the same conduct for $7.6 million.
On September 29, 1999, the company was served with an action based on the
company's handling of partially filled prescriptions for private third-party
plans by the Board of Trustees of the Carpenters & Millwrights of Houston &
Vicinity Welfare Trust Fund, Civil Action No. 599CV216, which was filed in the
United States District Court for the Eastern District of Texas. The complaint
seeks certification as a class action, as well as damages and treble damages in
excess of $1,000,000. Although the ultimate disposition of this suit cannot be
forecast with certainty, management is of the opinion that 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, 1999:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
L. Daniel Jorndt 58 Chairman and Chief Executive
Chairman of the Board since Officer
January 1999
Chief Executive Officer since
January 1998
President and Chief Operating Officer
February 1990 to January 1999
Director since January 1990
David W. Bernauer 55 President and Chief Operating
President and Chief Operating Officer Officer
Since January 1999
Senior Vice President July 1996 to
January 1999
Chief Information Officer
February 1995 to January 1999
Vice President
February 1990 to July 1996
Director since January 1999
Vernon A. Brunner 59 Executive Vice President
Executive Vice President since
February 1990
Director since July 1999
Jerome B. Karlin 57 Executive Vice President
Executive Vice President since
February 1999
Vice President
September 1987 to February 1999
Robert C. Atlas 64 Senior Vice President
Senior Vice President since
February 1999
Vice President
September 1987 to February 1999
W. Lynn Earnest 56 Senior Vice President
Senior Vice President since
February 1999
Vice President
July 1992 to February 1999
Treasurer
July 1992 to February 1996
George C. Eilers 59 Senior Vice President
Senior Vice President since
February 1999
Regional Vice President,
Drug Store Division, July 1992 to
February 1999
6
EXECUTIVE OFFICERS OF THE REGISTRANT - continued:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
Roger L. Polark 51 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 58 Senior Vice President
Senior Vice President since July 1991
William A. Shiel 48 Senior Vice President
Senior Vice President since July 1993
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
J. Randolph Lewis 49 Vice President
Vice President since March 1996
Divisional Vice President, Logistics
and Planning
September 1992 to February 1996
Julian A. Oettinger 60 Vice President, Secretary
Vice President, Secretary and and General Counsel
General Counsel since January 1989
Jeffrey A. Rein 47 Vice President and Treasurer
Vice President since July 1999
Treasurer since March 1996
District Manager
July 1990 to February 1996
William M. Rudolphsen 44 Controller
Controller since January 1998
Director of Accounting
September 1995 to December 1997
Accounting Manager
June 1988 to August 1995
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 29, 1999 there were 85,264
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, 1999, 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, 1999, are as follows:
Quarter Ended 1999 1998
November $.0325 $.03125
February .0325 .03125
May .0325 .03125
August .0325 .03125
Fiscal Year $.13 $.125
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
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, 1999,
1998 and 1997
Consolidated Balance Sheets at August 31, 1999 and 1998 23
Consolidated Statements of Cash Flows 24
for the years ended August 31, 1999, 1998 and 1997
Statement of Major Accounting Policies 25 - 26
Notes to Consolidated Financial Statements 26 - 29
Report of Independent Public Accountants 30
Simply Everywhere 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, 1999.
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 Quarterly Report on Form 10-Q for the quarter
ended February 28, 1999, and incorporated by reference
herein.
(b) By-Laws of the company, as amended and restated effective as
of January 13, 1999, filed with the Securities and Exchange
Commission as Exhibit 3(b) to the company's Quarterly Report
on Form 10-Q for the quarter ended February 28, 1999, and
incorporated by reference herein.
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 (File No. 1-604),
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 (File No. 1-604), 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
(File No. 1-604), 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 (File No. 1-604), 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 (File No. 1-604), and
incorporated by reference herein.
(o) Walgreen Co. Nonemployee Director Stock Plan Amendment No. 2
(effective September 1, 1998), filed with the Securities and
Exchange Commission as Exhibit 10(o)(iii) to the company's
Annual Report on Form 10-K for the fiscal year ended
August 31, 1998, and incorporated by reference herein.
(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, 1999, 1998 and 1997 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,
1999. 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, 1999, 1998 AND 1997
(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, 1999 $11.2 $27.0 $(29.2) $ 9.0
===== ===== ======= =====
Year ended August 31, 1998 $12.6 $17.3 $(18.7) $11.2
===== ===== ======= =====
Year ended August 31, 1997 $14.5 $13.8 $(15.7) $12.6
===== ===== ======= =====
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 27, 1999. 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 27, 1999
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 24, 1999
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/ L. D. Jorndt Chairman of the Board, November 24, 1999
L. D Jorndt Chief Executive Officer
and Director
/s/ David W. Bernauer President, Chief Operating November 24, 1999
David W. Bernauer Officer and Director
/s/ William M. Rudolphsen Controller November 24, 1999
William M. Rudolphsen
/s/ Vernon A. Brunner Director November 24, 1999
Vernon A. Brunner
/s/ William C. Foote Director November 24, 1999
William C. Foote
James J. Howard Director November 24, 1999
C. D. Hunter Director November 24, 1999
/s/ Alan G. McNally Director November 24, 1999
Alan G. McNally
/s/ Cordell Reed Director November 24, 1999
Cordell Reed
/s/ John B. Schwemm Director November 24, 1999
John B. Schwemm
William H. Springer Director November 24, 1999
Marilou M. von Ferstel Director November 24, 1999
/s/ C. R. Walgreen III Director November 24, 1999
C. R. Walgreen III
17
INDEX TO EXHIBITS
A. DOCUMENTS FILED WITH THIS REPORT
Exhibit 13 Annual Report to Shareholders for the Fiscal
Year Ended August 31, 1999.
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 3(b) By-Laws of the company, as amended and restated
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) Walgreen Co. Nonemployee Director Stock
Plan Amendment No. 2.
(p) Consulting Agreement between Walgreen Co.
and Charles R. Walgreen III.
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 1999 1998 1997 1996
<S> <C> <C> <C> <C>
Net Sales $17,838.8 $15,306.6 $13,363.0 $11,778.4
Costs and Deductions
Cost of sales 12,978.6 11,139.4 9,681.8 8,514.9
Selling, occupancy and
administration 3,844.8 3,332.0 2,972.5 2,659.5
Other (income) expense (1) (11.9) (41.9) (3.9) (2.9)
Total Costs and Deduction 16,811.5 14,429.5 12,650.4 11,171.5
Earnings
Earnings before income tax
provision and cumulative effect
of accounting changes 1,027.3 877.1 712.6 606.9
Income tax provision 403.2 339.9 276.1 235.2
Earnings before cumulative effect
of accounting changes 624.1 537.2 436.5 371.7
Cumulative effect of accounting
changes (2) - (26.4) - -
Net Earnings $ 624.1 $ 510.8 $ 436.5 $ 371.7
Per Common Share (3)
Earnings before cumulative effect
of accounting changes
Basic $ .62 $ .54 $ .44 $ .38
Diluted .62 .54 .44 .37
Net earnings
Basic .62 .51 .44 .38
Diluted .62 .51 .44 .37
Dividends declared .13 .13 .12 .11
Book value 3.47 2.86 2.40 2.08
Non-Current Liabilities
Long-term debt $ 18.0 $ 13.6 $ 3.3 $ 3.4
Deferred income taxes 74.8 89.1 112.8 145.2
Other non-current liabilities 405.8 369.9 279.2 259.9
Assets and Equity
Total assets $ 5.906.7 $ 4,901.6 $ 4,207.1 $ 3,633.6
Shareholders' equity $ 3,484.3 $ 2,848.9 $ 2,373.3 $ 2,043.1
Return on average shareholders'
equity 19.7% 19.6% 19.8% 19.4%
<FN>
(1) Fiscal 1998 includes a pre-tax gain of $37.4 million ($22.9 million after-
tax or $.02 per share) from the sale of the company's long-term care
pharmacy business.
(2) Fiscal 1998 includes the $26.4 million ($.03 per share) charge from the
cumulative effect of accounting change for system development costs.
Fiscal 1993 includes the $23.6 million ($.02 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 1999, 1997
1995 and 1991.
1995 1994 1993 1992 1991 1990 1989
<C> <C> <C> <C> <C> <C> <C>
$10,395.1 $9,235.0 $8,294.8 $7,475.0 $6,733.0 $6,047.5 $5,380.1
7,482.3 6,614.4 5,959.0 5,377.7 4,829.2 4,356.4 3,848.5
2,392.7 2,164.9 1,929.6 1,738.8 1,582.7 1,406.9 1,278.1
(3.6) (2.7) 6.5 5.5 9.1 3.3 9.7
9,871.4 8,776.6 7,895.1 7,122.0 6,421.0 5,766.6 5,136.3
523.7 458.4 399.7 353.0 312.0 280.9 243.8
202.9 176.5 154.4 132.4 117.0 106.3 89.6
320.8 281.9 245.3 220.6 195.0 174.6 154.2
- - (23.6) - - - -
$ 320.8 $ 281.9 $ 221.7 $ 220.6 $ 195.0 $ 174.6 $ 154.2
$ .33 $ .29 $ .25 $ .22 $ .20 $ .18 $ .16
.33 .29 .25 .22 .20 .18 .16
.32 .29 .23 .22 .20 .18 .16
.32 .29 .23 .22 .20 .18 .16
.11 .09 .08 .07 .06 .05 .05
1.82 1.60 1.40 1.25 1.10 .96 .84
$ 2.4 $ 1.8 $ 6.2 $ 18.7 $ 123.0 $ 146.7 $ 150.1
142.3 137.7 144.2 171.8 155.3 138.9 118.3
237.6 213.8 176.2 103.8 85.1 77.1 68.6
$ 3,252.6 $2,872.8 $2,506.0 $2,346.9 $2,074.4 $1,896.1 $1,666.3
$ 1,792.6 $1,573.6 $1,378.8 $1,233.3 $1,081.2 $ 947.2 $ 823.4
19.1% 19.1% 18.8% 19.1% 19.2% 19.7% 20.1%
_____________________________________________________________________________
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Fiscal 1999 was the twenty-fifth consecutive year of record sales and earnings.
Net earnings were $624.1 million or $.62 per share (diluted), an increase of
22.2% from last year's earnings of $510.8 million or $.51 per share. Included
in last year's results was a $26.4 million after-tax charge ($.03 per share)
related to an accounting change and an offsetting $.02 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
(as a percent to sales)
1997 1998 1999
22.2% 21.8% 21.6%
Total net sales increased by 16.5% to $17.8 billion in fiscal 1999 compared
to increases of 14.5% in 1998 and 13.5% in 1997. 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 11.2% in 1999,
9.4% in 1998 and 8.1% in 1997. New store openings accounted for 10.0% of the
sales gains in 1999, 10.4% in 1998 and 8.6% in 1997. The company operated 2,821
drugstores as of August 31, 1999, compared to 2,549 a year earlier.
Prescription sales increased 23.3% in 1999, 20.6% in 1998 and 18.1% in 1997.
Comparable drugstores were up 19.4% in 1999, 15.6% in 1998 and 13.0% in 1997.
Prescription sales were 52.4% of total sales for fiscal 1999 compared to 49.6%
in 1998 and 47.1% in 1997. 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 were 27.2% in 1999 and 1998, and 27.5%
in 1997. Lower prescription gross margins were offset by higher margins in the
rest of the store. Third party retail and mail order sales, the margina of
which are under continued pressure from the reimbursement rates demanded by
managed care organizations, continue to become a larger portion of pharmacy
sales. 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. These continuing efforts have successfully slowed the
decline of third party prescription margins, however, sales volume may be
sacrificed.
The company uses the last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were 1.84% in 1999, 2.15% in 1998
and .82% in 1997, which resulted in charges to cost of sales of $45.2 million in
1999, $46.5 million in 1998 and $16.5 million in 1997. Inflation on
prescription inventory was 5.2% in 1999, 5.5% in 1998 and 1.9% in 1997.
Selling, occupancy and administration expenses were 21.6% of sales in fiscal
1999, 21.8% of sales in fiscal 1998 and 22.2% of sales in fiscal 1997. The
decreases in fiscal 1999 and 1998, as a percent to sales, were caused by lower
payroll, advertising and headquarters expenses.
Interest income increased in 1999 principally from higher investment levels.
Average net investment levels were approximately $220 million in 1999, $72
million in 1998 and $79 million in 1997.
The effective tax rate increased to 39.25% this fiscal year compared to
38.75% in fiscal 1998 and fiscal 1997. The increase was principally the result
of lower tax-advantaged investments.
Financial Condition
Cash and cash equivalents were $141.8 million at August 31, 1999, compared to
$144.4 million at August 31, 1998. 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 1999 was $625.2 million
compared to $571.2 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 $645.5 million in fiscal 1999 and
$502.3 million in 1998. Additions to property and equipment were $696.3 million
compared to $641.0 million last year. During the year, 386 new or relocated
drugstores were opened. This compares to 304 new or relocated drugstores opened
in the same period last year. New stores are owned or leased. There were 131
owned locations opened during the year or under construction at August 31, 1999
versus 136 for the same period last year. During fiscal 1998, the surrender of
certain corporate-owned life insurance policies resulted in net proceeds of $58
million. Property and equipment disposition of $72 million in fiscal 1998
includes the proceeds from the sale of the company's 14 long-term care pharmacy
facilities.
Capital expenditures for fiscal 2000 are budgeted to be $1 billion. The
company expects to open 450 new stores in fiscal 2000 and have a total of 6,000
drugstores by the year 2010. By the end of calendar 2000, stores will be added
in four more states - Georgia, Maryland, Utah and Wyoming, bringing coverage to
43 states and Puerto Rico. Major upcoming markets are Atlanta, Baltimore and
Southern California, where 200 full-size stores are planned by 2005. The
company is continuing to relocate stores to more convenient and profitable
freestanding locations. In addition to new stores, a significant portion of the
expenditures will be made for technology and distribution centers. The company
will launch a new full-service internet pharmacy early in fiscal 2000 and plans
to open or expand one distribution center a year for the next five years. This
may necessitate future long-term borrowings.
[PIE CHART] CAPITAL EXPENDITURES-FISCAL YEAR 2000
More than $1 billion to be spent
-Stores (69%)
-Distribution (13%)
-Store Technology (8%)
-Technology (6%)
-Corporate (4%)
Net cash provided by financing activities was $17.7 million compared to $2.6
million a year ago. At August 31, 1999, the company had approximately $81
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. Each process
was broken down into tasks which included analysis at the program level to
identify date issues, modifications to programs where the date processing did
not properly handle the year 2000 and testing to insure the process functions
correctly in the year 2000. For many key processes such as pharmacy, inventory
control, and financial systems, year 2000 simulations were executed by running
year 2000 ready processes on non-production hardware while modifying the system
date to simulate the year 2000. At August 31, 1999, it is estimated that 99% of
the work plan activities have been completed and approximately 90% of the costs
have been incurred. The total cost of these changes is expected to be
approximately $9 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 potential adverse effects on
the company of any failure by other parties to achieve year 2000 compliance.
The company is developing contingency plans that identify "risk points" within
key business processes such as pharmacy and cash flow. For each "risk point"
identified, the probability of failure is estimated and a contingency
alternative solution identified. Although effort is being made to develop the
best contingency alternative solutions, in some cases the alternative solution
is not as optimal as the process it would replace. The goals of the contingency
plans are to identify and document alternative solutions that could be
implemented in the event of failure and would allow the company to continue to
provide service to its customers and business partners. Plans will remain
flexible and subject to change.
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 expected to result in approximately $15 million of capitalized
costs during fiscal year 2000 which would have been expensed under the company's
prior policy.
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 that involve risks and uncertainties.
Those risks and uncertainties include changes in economic conditions generally
or in the markets served by the company; consumer preferences and spending
patterns; changes in state or federal legislation or regulations; the
availability and cost of real estate and construction; competition; and risks of
new business areas. Please see Walgreen Co.'s Form 10-K for the period ended
August 31, 1999, for a discussion of certain other 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, 1999, 1998 and 1997
(Dollars in Millions, except per share data)
_______________________________________________________________________________
Earnings 1999 1998 1997
Net Sales $17,838.8 $15,306.6 $13,363.0
Costs and Deductions
Cost of sales 12,978.6 11,139.4 9,681.8
Selling, occupancy and administration 3,844.8 3,332.0 2,972.5
16,823.4 14,471.4 12,654.3
Other (Income) Expense
Interest income (12.3) (5.6) (5.5)
Interest expense .4 1.1 1.6
Gain on sale of long-term care pharmacies - (37.4) -
(11.9) (41.9) (3.9)
Earnings
Earnings before income tax provision and
cumulative effect of accounting change 1,027.3 877.1 712.6
Income tax provision 403.2 339.9 276.1
Earnings before cumulative effect of
accounting change 624.1 537.2 436.5
Cumulative effect of accounting change
for system development costs - (26.4) -
Net Earnings $ 624.1 $ 510.8 $ 436.5
_______________________________________________________________________________
Net Earnings per Common Share
Basic
Earnings before cumulative effect of
accounting change $ .62 $ .54 $ .44
Cumulative effect of accounting change
for system development costs - (.03) -
Net Earnings $ .62 $ .51 $ .44
Diluted
Earnings before cumulative effect of
accounting change $ .62 $ .54 $ .44
Cumulative effect of accounting change
for system development costs - (.03) -
Net Earnings $ .62 $ .51 $ .44
Average shares outstanding 1,000,363,234 992,169,240 984,881,476
Dilutive effect of stock options 13,918,481 13,523,672 11,787,614
Average shares outstanding assuming
dilution 1,014,281,715 1,005,692,912 996,669,090
Common Stock Paid-in Retained
Shareholders' Equity Shares Amount Capital Earnings
Balance, August 31, 1996 984,564,288 $76.9 $ - $1,966.2
Net earnings - - - 436.5
Cash dividends declared ($.12 per share) - - - (118.3)
Employee stock purchase and option plans 3,015,644 .3 29.8 (18.1)
Balance, August 31, 1997 987,579,932 77.2 29.8 2,266.3
Net earnings - - - 510.8
Cash dividends declared ($.125 per share) - - - (124.1)
Employee stock purchase and option plans 8,907,112 .6 88.3 -
Balance, August 31, 1998 996,487,044 77.8 118.1 2,653.0
Net earnings - - - 624.1
Cash dividends declared ($.13 per share) - - - (130.1)
Employee stock purchase and option plans 7,535,214 .6 140.8 -
Balance, August 31, 1999 1,004,022,258 $78.4 $258.9 $3,147.0
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, 1999 and 1998
(Dollars in Millions)
________________________________________________________________________________
Assets 1999 1998
Current Assets
Cash and cash equivalents $ 141.8 $ 144.4
Accounts receivable, net 486.5 373.2
Inventories 2,462.6 2,026.9
Other current assets 130.8 78.6
Total Current Assets 3,221.7 2,623.1
Non-Current Assets
Property and equipment, at cost, less accumulated
depreciation and amortization 2,593.9 2,143.4
Other non-current assets 91.1 135.1
Total Assets $5,906.7 $4,901.6
________________________________________________________________________________
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $1,130.3 $ 906.9
Accrued expenses and other liabilities 730.1 618.4
Income taxes 63.4 54.8
Total Current Liabilities 1,923.8 1,580.1
Non-Current Liabilities
Deferred income taxes 74.8 89.1
Other non-current liabilities 423.8 383.5
Total Non-Current Liabilities 498.6 472.6
Shareholders' Equity
Preferred stock, $.0625 par value; authorized
32 million shares; none issued - -
Common stock, $.078125 par value; authorized 3.2 billion
shares; issued and outstanding 1,004,022,258 in 1999
and 996,487,044 in 1998 78.4 77.8
Paid-in capital 258.9 118.1
Retained earnings 3,147.0 2,653.0
Total Shareholders' Equity 3,484.3 2,848.9
Total Liabilities and Shareholders' Equity $5,906.7 $4,901.6
________________________________________________________________________________
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, 1999, 1998 and 1997
(In Millions)
_______________________________________________________________________________
Fiscal Year 1999 1998 1997
Cash Flows from Operating Activities
Net earnings $624.1 $510.8 $436.5
Adjustments to reconcile net earnings to net
cash provided by operating activities -
Cumulative effect of accounting
change for system development costs - 26.4 -
Depreciation and amortization 210.1 189.6 163.9
Deferred income taxes (9.4) (.8) 7.5
Gain on sale of long-term care pharmacies - (37.4) -
Other 12.2 28.7 7.8
Changes in operating assets and
liabilities -
Inventories (435.7) (298.8) (100.8)
Trade accounts payable 223.4 94.2 120.9
Accounts receivable, net (106.0) (19.7) (74.6)
Accrued expenses and other liabilities 103.7 99.3 73.4
Income taxes 8.6 (17.2) 12.3
Other (5.8) (3.9) 3.4
Net cash provided by operating activities 625.2 571.2 650.3
Cash Flows from Investing Activities
Additions to property and equipment (696.3) (641.0) (485.1)
Disposition of property and equipment 41.7 71.9 15.2
Net borrowing from (investment in)
corporate-owned life insurance 9.1 8.8 (16.2)
Proceeds from the surrender of corporate-
owned life insurance - 58.0 -
Net cash used for investing activities (645.5) (502.3) (486.1)
Cash Flows from Financing Activities
Proceeds from employee stock plans 131.8 105.1 16.9
Cash dividends paid (128.6) (122.6) (115.7)
Other 14.5 20.1 (1.3)
Net cash provided by (used for) financing
activities 17.7 2.6 (100.1)
Changes in Cash and Cash Equivalents
Net (decrease) increase in cash and
cash equivalents (2.6) 71.5 64.1
Cash and cash equivalents at
beginning of year 144.4 72.9 8.8
Cash and cash equivalents at
end of year $141.8 $144.4 $ 72.9
_______________________________________________________________________________
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 39 states and Puerto Rico. At August 31, 1999, there were 2,819 retail
drugstores and two mail service facilities. Prescription sales were 52.4% of
total sales for fiscal 1999 compared to 49.6% in 1998 and 47.1% in 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. The company's operations are within one reportable
segment.
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 $43.1 million, or $.03 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 was 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
$191 million and $148 million at August 31, 1999 and 1998, respectively, are
included in cash and cash equivalents as reductions of other cash balances.
Financial Instruments
The company had approximately $57 million and $53 million of outstanding letters
of credit at August 31, 1999 and 1998, respectively, which guaranteed foreign
trade purchases. Additional outstanding letters of credit of $43 million and
$41 million at August 31, 1999 and 1998, 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 $342 million and $242 million at August 31, 1999 and 1998,
respectively, related to the purchase of store locations. There were no
investments in derivative financial instruments during fiscal 1999 and 1998.
Inventories
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market
basis. At August 31, 1999 and 1998, inventories would have been greater by
$536.0 million and $490.8 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. Impaired
amounts are measured by comparing the present value of the estimated future cash
flows to the carrying value of the 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):
1999 1998
Land and land improvements
Owned stores $ 513.7 $ 359.6
Distribution centers 21.1 20.9
Other locations 12.2 9.1
Buildings and building improvements
Owned stores 564.2 403.5
Leased stores (leasehold improvements only) 366.3 345.8
Distribution centers 171.3 159.0
Other locations 48.8 45.3
Equipment
Stores 1,068.6 907.6
Distribution centers 214.3 187.5
Other locations 390.0 383.9
Capitalized system development costs 79.4 123.3
Capital lease properties 22.8 14.6
3,472.7 2,960.1
Less: accumulated depreciation and amortization 878.8 816.7
$2,593.9 $2,143.4
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.
These costs are amortized over a five-year period as phases of these various
systems are implemented. Amortization of these costs were $15.6 million in 1999,
$13.0 million in 1998 and $13.9 million in 1997. Unamortized costs as of August
31, 1999 and 1998, were $51.3 million and $53.1 million, respectively.
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.
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.
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 $58.7 million in 1999,
$59.7 million in 1998 and $67.9 million in 1997.
Notes to Consolidated Financial Statements
Interest Expense
The company capitalized $2.6 million, $1.6 million and $.4 million of interest
expense as part of significant construction projects during fiscal 1999, 1998
and 1997. Interest paid, net of amounts capitalized, was $.4 million in 1999,
$.8 million in 1998 and $1.6 million in 1997.
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 $37.4 million ($22.9 million after-tax or $.02
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, 1999, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Millions):
Year
2000 $ 528.8
2001 567.0
2002 553.6
2003 540.1
2004 528.2
Later 5,941.4
Total minimum lease payments $8,659.1
The above minimum lease payments include minimum rental commitments related to
capital leases amounting to $19.5 million at August 31, 1999. The present value
of net minimum capital lease payments, due after 2000, 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 $26.8 million on leases due in the future
under non-cancelable subleases.
Rental expense was as follows (In Millions):
1999 1998 1997
Minimum rentals $482.0 $405.8 $356.8
Contingent rentals 34.8 35.2 35.6
Less: Sublease rental income (5.4) (3.7) (3.0)
$511.4 $437.3 $389.4
Income Taxes
The provision for income taxes consists of the following (In Millions):
1999 1998 1997
Current provision -
Federal $350.5 $290.2 $228.1
State 62.1 50.5 40.5
412.6 340.7 268.6
Deferred provision -
Federal (8.0) (2.2) 6.6
State (1.4) 1.4 .9
(9.4) (.8) 7.5
$403.2 $339.9 $276.1
The components of the deferred provision were (In Millions):
1999 1998 1997
Employee benefit plans $(12.2) $(10.4) $(13.8)
Inventory 11.1 (2.6) 21.7
Accelerated depreciation 9.7 22.2 9.1
Other (18.0) (10.0) (9.5)
$ (9.4) $ (.8) $ 7.5
The deferred tax assets and liabilities included in the Consolidated Balance
Sheets consist of the following (In Millions):
1999 1998
Deferred tax assets -
Employee benefit plans $117.8 $105.6
Accrued rent 49.7 41.0
Insurance 41.6 38.8
Inventory 17.6 16.0
Other 42.4 43.5
269.1 244.9
Deferred tax liabilities -
Accelerated depreciation 240.5 230.8
Inventory 66.0 53.4
Other 11.0 18.4
317.5 302.6
Net deferred tax liabilities $ 48.4 $ 57.7
Income taxes paid were $377.3 million, $332.8 million and $243.1 million during
the fiscal years ended August 31, 1999, 1998 and 1997, 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):
1999 1998 1997
Average outstanding during the year $ 9.6 $ 17.8 $ 8.0
Largest month-end balance 100.0 50.0 42.0
(Nov) (Oct) (Sept)
Weighted average interest rate 5.1% 5.7% 5.4%
There were no short-term borrowings at August 31, 1999 or August 31, 1998. At
August 31, 1999 the company had approximately $81 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
All share data have been adjusted to reflect a two-for-one stock split
distributed to shareholders February 12, 1999. In addition, the Board of
Directors approved increases in the authorized common stock, from 1.6 billion
shares to 3.2 billion shares, and in the authorized preferred stock, from 16
million shares to 32 million shares.
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 $37.50 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 $.0025 per Right at any time prior to a public
announcement that the above event has occurred.
As of August 31, 1999, 107,124,410 shares of common stock were reserved for
future stock issuances under the company's employee stock purchase, option and
award plans. Preferred stock of 10,040,223 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
38,400,000 shares of common stock of the company. The options granted during
fiscal 1999, 1998 and 1997 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 1999, 1998 and
1997. Options may be granted under this Plan until September 30, 2002, for an
aggregate of 40,000,000 shares of common stock of the company. The options
granted during fiscal 1999, 1998 and 1997 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, 1996 28,907,216 $ 4.25
Granted 9,413,872 8.99
Exercised (4,467,984) 3.13
Canceled/Forfeited (287,272) 6.50
August 31, 1997 33,565,832 $ 5.70 19,749,884 $4.33
Granted 1,972,162 14.02
Exercised (5,667,682) 3.78
Canceled/Forfeited (264,356) 8.54
August 31, 1998 29,605,956 $ 6.59 18,255,338 $4.62
Granted 2,606,350 19.70
Exercised (3,644,250) 5.71
Canceled/Forfeited (88,818) 9.81
August 31, 1999 28,479,238 $ 7.89 21,821,426 $5.91
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 8/31/99 Life Price at 8/31/99 Price
$ 1 to 5 15,359,092 3.77 yrs. $ 4.61 15,359,092 $ 4.61
6 to 13 10,124,404 7.22 9.54 6,460,112 8.99
14 to 32 2,995,742 8.95 19.15 2,222 19.44
$ 1 to 32 28,479,238 5.54 yrs. $ 7.89 21,821,426 $ 5.91
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 64,000,000.
The Walgreen Co. Restricted Performance Share Plan provides for the
granting of up to 32,000,000 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
$3.7 million in fiscal 1999, $4.6 million in fiscal 1998 and $4.9 million in
fiscal 1997. The number of shares granted was 95,038 in 1999, 130,350 in 1998
and 217,352 in 1997.
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 1999, 1998 and
1997, pro forma net earnings and net earnings per common share would have been
as follows (In Millions, except per share data):
1999 1998 1997
Net earnings
As reported $624.1 $510.8 $436.5
Pro forma 605.3 497.2 422.6
Net earnings per common share - Basic
As reported .62 .51 .44
Pro forma .61 .50 .43
Net earnings per common chare - Diluted
As reported .62 .51 .44
Pro forma .60 .50 .43
The weighted-average fair value and exercise price of options granted for fiscal
1999, 1998 and 1997 were as follows:
1999 1998 1997
Granted at market price -
Weighted-average fair value $ 6.99 $ 5.27 $3.33
Weighted-average exercise price 19.61 14.08 8.26
Granted below market price -
Weighted-average fair value 9.45 4.81 3.48
Weighted-average exercise price 20.89 13.83 9.20
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 1999, 1998 and 1997:
1999 1998 1997
Risk-free interest rate 5.11% 6.19% 6.29%
Average life of option (years) 7 7 6
Volatility 21.78% 20.39% 20.00%
Dividend yield .32% .53% 1.07%
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 $91.4 million in 1999, $78.7 million in 1998 and
$59.3 million in 1997.
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. At August 31,
1999, the unrecognized actuarial gain was $.7 million compared to an $8.4
million loss at August 31, 1998. The company's postretirement health and life
benefit plans currently are not funded.
Components of net periodic benefit costs (In Millions):
1999 1998 1997
Service cost $ 5.2 $ 4.3 $ 3.8
Interest cost 7.3 6.8 6.2
Amortization of actuarial loss .4 - -
Total postretirement healthcare benefits costs $12.9 $11.1 $10.0
Change in benefit obligation (In Millions):
1999 1998
Benefit obligation at September 1 $105.6 $ 88.9
Service cost 5.2 4.3
Interest cost 7.3 6.8
Actuarial (gain)loss (9.9) 8.8
Benefit payments (4.4) (3.9)
Participants contributions .8 .7
Benefit obligation at August 31 $104.6 $105.6
The discount rate assumptions used to compute the postretirement benefit
obligation at year-end were 7.5% for 1999 and 7% for 1998.
Future benefit costs were estimated assuming medical costs would increase at
a 6.5% annual rate decreasing to 5% over the next 5 years and then remaining at
a 5% annual growth rate thereafter. A one percentage point change in the
assumed medical cost trend rate would have the following effects (In Millions):
1% 1%
Increase Decrease
Effect on service and interest cost $ 3.2 $ (2.5)
Effect on postretirement obligation 20.9 (17.9)
Supplementary Financial Information
Included in the Consolidated Balance Sheets captions are the following assets
and liabilities (In Millions):
1999 1998
Accounts receivable -
Accounts receivable $495.5 $384.4
Allowances for doubtful accounts (9.0) (11.2)
$486.5 $373.2
Accrued expenses and other liabilities -
Accrued salaries $239.4 $195.7
Taxes other than income taxes 104.1 84.7
Profit sharing 89.5 99.1
Other 297.1 238.9
$730.1 $618.4
Summary of Quarterly Results (Unaudited)
(Dollars in Millions, except per share data)
__________________Quarter Ended___________________
Fiscal
November February May August Year
Fiscal 1999
Net sales $4,016.4 $4,691.0 $4,571.4 $4,560.0 $17,838.8
Gross profit 1,074.7 1,298.6 1,240.7 1,246.2 4,860.2
Net earnings 104.0 200.2 159.3 160.6 624.1
Per Common Share -
Basic $ .10 $ .20 $ .16 $ .16 $ .62
Diluted .10 .20 .16 .16 .62
Fiscal 1998
Net sales $3,485.2 $4,093.4 $3,887.5 $3,840.5 $15,306.6
Gross profit 944.2 1,132.7 1,046.7 1,043.6 4,167.2
Earnings before
cumulative
effect of
accounting
change 87.7 170.9 125.9 152.7 537.2
Net earnings 61.3 170.9 125.9 152.7 510.8
Per Common Share -
Basic
Earnings before
cumulative effect
of accounting
change $ .09 $ .17 $ 13 $ .15 $ .54
Net earnings .06 .17 .13 .15 .51
Per Common Share -
Diluted
Earnings before
cumulative effect
of accounting
change .09 .17 .13 .15 .54
Net earnings .06 .17 .13 .15 .51
Comments on Quarterly Results:
In further explanation of and supplemental to the quarterly results, the 1999
fourth quarter LIFO adjustment was a credit of $.7 million compared to a 1998
charge of $14.1 million. If the 1999 interim results were adjusted to reflect
the actual inventory inflation rates and inventory levels as computed at August
31, 1999, earnings per share would have been higher in the second quarter by
$.01, and lower in the fourth quarter by $.01.
The quarter ended August 31, 1998, includes the pre-tax gain of $37.4 million
($22.9 million after-tax or $.02 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
1999 and 1998.
________________Quarter Ended________________
Fiscal
November February May August Year
Fiscal 1999 High $27 3/8 $33 1/16 $30 15/16 $29 7/8 $33 1/16
Low 20 3/8 26 5/16 23 1/4 23 3/16 20 3/8
Fiscal 1998 High $16 3/8 $18 9/16 $18 9/32 $24 15/32 $24 15/32
Low 12 13/16 14 1/8 16 7/16 18 3/32 12 13/16
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, 1999 and
1998, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended
August 31, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois,
September 27, 1999
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
Chairman of the Board Controller
and Chief Executive Officer and Chief Accounting Officer
/s/ R. L. Polark
Senior Vice President
and Chief Financial Officer
Simply Everywhere
State 1998 1999
Alabama 1 5
Arizona 137 114
Arkansas 9 12
California 196 212
Colorado 53 55
Connecticut 32 31
Florida 412 442
Idaho 0 1
Illinois 345 371
Indiana 103 106
Iowa 33 36
Kansas 20 22
Kentucky 39 40
Louisiana 55 61
Massachusetts 73 76
Michigan 40 61
Minnesota 64 67
Mississippi 7 13
Missouri 82 93
Nebraska 30 33
Nevada 16 28
New Hampshire 9 10
New Jersey 40 41
New Mexico 40 40
New York 34 41
North Carolina 0 5
North Dakota 1 1
Ohio 76 82
Oklahoma 26 30
Oregon 12 13
Pennsylvania 7 10
Rhode Island 14 15
South Carolina 0 2
South Dakota 0 2
Tennessee 85 96
Texas 261 304
Virginia 12 19
Washington 22 26
Wisconsin 119 128
Puerto Rico 44 47
Total 2,549 2,821
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 15 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 21
inactive subsidiaries. These 26 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
ARTHUR ANDERSEN
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated September 27, 1999 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 24, 1999
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IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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