Annual Report
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended August 31, 2007.
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o
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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
.
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WALGREEN
CO
.
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(Exact
name of registrant as specified in its charter)
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Illinois
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36-1924025
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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200
Wilmot Road, Deerfield, Illinois
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60015
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
(847)
914-2500
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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|
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Common
Stock ($.078125 Par Value)
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New
York Stock Exchange
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The
NASDAQ Stock Market LLC
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||
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Chicago
Stock Exchange
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Securities
registered pursuant to section 12(g) of the
Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
x
No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months and (2) has been subject to such filing requirements for
the
past 90 days.Yes
x
No
o
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.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
x
Accelerated
filer
o
Non-accelerated
filer
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
o
No
x
As
of
February 28, 2007, the aggregate market value of Walgreen Co. common stock,
par
value $.078125 per share, held by non-affiliates (based upon the closing
transaction price on the New York Stock Exchange) was approximately
$44,357,869,000. As of September 30, 2007, there were 991,615,851
shares of Walgreen Co. common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Annual Report to Shareholders for the year ended August 31, 2007, 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 2007 annual meeting of shareholders to be held January 9,
2008, are incorporated by reference into part III of Form 10-K.
PART
I
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Item
1.
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Business
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(a)
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General
development of business.
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Walgreen
Co. (The "company" or "Walgreens") was incorporated as an Illinois corporation
in 1909 as a successor to a business founded in 1901. Walgreens is
the nation's largest drugstore chain (based on sales) and recorded its 33rd
year
of consecutive sales and earnings growth. During the year, the
company opened or acquired 563 stores for a net increase of 478 stores after
relocations and closings, not including 58 locations acquired from Option Care,
Inc. The total number of locations at August 31, 2007 was 5,997
located in 48 states and Puerto Rico. Aggressive growth will continue as the
company anticipates operating more than 7,000 locations in 2010.
Retail
organic growth continues to be our primary growth vehicle, but we carefully
consider unique acquisition opportunities when they are a good fit with the
existing store base. In 2007, for example, the company acquired
Option Care, Inc., a specialty pharmacy and home infusion services
provider.
Prescription
sales continue to become a larger portion of the company's
business. This year prescriptions accounted for 65.0% of sales
compared to 64.3% last year. Third party sales, where reimbursement
is received from managed care organizations, government and private insurance,
were 94.8% of prescription sales compared to 93.1% a year
ago. Overall, Walgreens filled approximately 583 million
prescriptions in 2007, an increase of 10% from the previous year.
Walgreens
pharmacy sales are expected to continue to grow due, in part, to the aging
population, the introduction of lower priced generics and the continued
development of innovative drugs that improve quality of life and control
healthcare costs. Also, the increase in generic introductions
continues to boost the number of prescriptions filled. Although
generics reduce sales dollars, they save both patients and payors money and
generally offer higher gross profit than brand name drugs.
During
fiscal 2007, Walgreens' market share in 59 of the top 60 front-end categories
increased, as compared to all food, drug and mass merchandise
competitors. Today, 139.1 million people live within two miles of a
Walgreens and 5.0 million shoppers walk into a Walgreens store
daily.
During
fiscal year 2007 the company added $1.8 billion to property and equipment,
which
included approximately $1.425 billion related to stores, $184.2 million for
distribution centers, and $176.5 million related to other corporate
items. Capital expenditures for fiscal 2008 are expected to
be more than $2.0 billion, excluding acquisitions.
In
fiscal
2007, the company opened a distribution center located in Anderson, South
Carolina. This is the first of a new-generation of distribution centers, which
will increase productivity 20% from the last generation. A second
new-generation center in Windsor, Connecticut is planned to open in fiscal
2009.
Walgreens
plans to increase business by investing in prime locations, new technology
and
customer service initiatives in fiscal 2008.
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(b)
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Financial
information about industry
segments.
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The
company is principally in the retail drugstore business and its operations
are
within one reportable segment.
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(c)
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Narrative
description of business.
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(i)
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Principal
products produced and services
rendered.
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The
drugstores are engaged in the retail sale of prescription and non-prescription
drugs and general merchandise. General merchandise includes, among
other things, beauty care, personal care, household items, candy,
photofinishing, greeting cards, seasonal items and convenience
foods. Customers can have prescriptions filled at the drugstore
counter, as well as through the mail, by telephone and via the
Internet.
The
estimated contributions of various product classes to sales for each of the
last
three fiscal years are as follows:
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Product
Class
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Percentage
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2007
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2006
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2005
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Prescription
Drugs
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65
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64
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64
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Non-prescription
Drugs
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10
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11
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11
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General
Merchandise
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25
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25
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25
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Total
Sales
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100
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100
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100
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(ii)
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Status
of a product or segment.
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Not
applicable.
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(iii)
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Sources
and availability of raw materials.
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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.
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(iv)
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Patents,
trademarks, licenses, franchises and concessions
held.
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Walgreens
markets products under various trademarks, trade dress and trade names and
holds
assorted business licenses (pharmacy, occupational, liquor, etc.) having various
lives, which are necessary for the normal operation of business. The
company also has filed various patent applications relating to its business
and
products, eight of which have been issued.
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(v)
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Seasonal
variations in business.
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The
business is seasonal in nature, with Christmas generating a higher proportion
of
front-end sales and earnings than other periods. Both prescription
and non-prescription drug sales are affected by the timing and severity of
the
cold/flu season. See the caption "Summary of Quarterly Results
(Unaudited)" on page 34 of the Annual Report to Shareholders for the year ended
August 31, 2007 ("2007 Annual Report"), which section is incorporated herein
by
reference.
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(vi)
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Working
capital practices.
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The
company generally finances its inventory and expansion needs with internally
generated funds. In 2007, we supplemented cash provided by operations with
short-term borrowings. See Note 7, "Short-Term Borrowings" on
page 30 and "Management's Discussion and Analysis of Financial Condition" on
pages 20 through 23 of the 2007 Annual Report, which sections are incorporated
herein by reference.
Due
to
the nature of the retail drugstore business 94.8% of all prescription sales
are
now covered by third party payors. Prescription sales represent 65.0%
of total store sales. The remainder of store sales are principally
for cash, credit and debit cards. Customer returns are
immaterial.
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(vii)
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Dependence
upon limited number of customers.
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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.
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(viii)
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Backlog
orders.
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Not
applicable.
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(ix)
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Government
contracts.
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The
company fills prescriptions for many state public assistance plans. Revenues
from all such plans are approximately 5.2% of total sales.
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(x)
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Competitive
conditions.
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The
drug
store industry is highly competitive. As a volume leader in the
retail drug industry, Walgreens competes with various retailers, including
chain
and independent drugstores, mail order prescription providers, grocery stores,
convenient stores, mass merchants and dollar stores. Competition
remained keen during the fiscal year with the company competing on the basis
of
service, convenience, variety and price. The company's geographic
dispersion tends to offset the impact of temporary economic and competitive
conditions in individual markets. The number and location of the company's
drugstores appears under Item 2 - "Properties" in this 10-K.
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(xi)
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Research
and development activities.
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The
company does not engage in any material research activities.
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(xii)
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Environmental
disclosures.
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Federal,
state and local environmental protection requirements have no material effect
upon capital expenditures, earnings or the competitive position of the
company.
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(xiii)
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Number
of employees.
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The
company employs approximately 226,000 persons, about 69,300 of whom are
part-time employees working less than 30 hours per week.
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(d)
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Financial
information about foreign and domestic operations and export
sales.
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All
the
company sales occurred within the continental United States and Puerto
Rico. There are no export sales.
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(e)
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Available
information
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The
company maintains a website at investor.walgreens.com. The company
makes copies of its Annual Reports on Form 10-K, quarterly reports on Form
10-Q,
Current Reports on Form 8-K and any amendments to those reports filed with
or
furnished to the SEC available to investors on or through its website free
of
charge as soon as reasonably practicable after the company electronically files
them with or furnishes them to the SEC. The contents of the company's
website are not, however, a part of this report. In addition,
charters of all committees of the company's Board of Directors, as well as
the
company's Corporate Governance Guidelines and Ethics Policy Statement, are
available on the company's website at investor.walgreens.com or, upon written
request, in printed hardcopy form. Written requests should be sent to
Walgreen Co., Attention: Shareholder Relations, Mail Stop #2261, 200 Wilmot
Road, Deerfield, Illinois 60015. Changes to or waivers, if any, of
the company's Ethics Policy Statement for directors and executive officers
would
be promptly disclosed on the company's website.
The
company has also adopted a Code of Ethics for Financial
Executives. This Code applies to and has been signed by the Chief
Executive Officer, the Chief Financial Officer and the
Controller. The full text of the Code of Ethics for Financial
Executives is available at the company's website,
investor.walgreens.com. Changes to or waivers, if any, of the
company's Code of Ethics for Financial Executives would be promptly disclosed
on
the company's website.
Cautionary
Note Regarding Forward Looking Statements
Certain
information in this annual report, as well as in other public filings, the
company website, 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 and location
of
new store openings, outcomes of litigation, the level of capital expenditures,
demographic trends; as well as those that include or are preceded by the words
"expects," "estimates," "believes," "plans," "anticipates" or similar language.
For such statements, we claim the protection of the safe harbor provisions
of
the Private Securities Litigation Reform Act of 1995.
Forward-looking
statements may involve risks and uncertainties, known or unknown to the company,
that could cause results to differ materially from management expectations
as
projected in such forward-looking statements. These risks and uncertainties
are
discussed in Item 1A below. Unless otherwise required by applicable securities
laws, the company assumes no obligation to update its forward-looking statements
to reflect subsequent events or circumstances.
Item
1A.
Risk Factors
The
risks
described below could materially and adversely affect our business, financial
condition and results of operations. These risks are not the only risks that
we
face. Our business operations could also be affected by additional factors
that
are not presently known to us or that we currently consider to be immaterial
to
our operations.
The
retail drug store and pharmacy benefit services industries are highly
competitive and further increases in competition could adversely affect
us.
We
face
intense competition with local, regional and national companies, including
other
drug store chains, independent drug stores, mail-order prescription providers
and various other retailers such as grocery stores, convenience stores, mass
merchants and dollar stores, many of which are aggressively expanding in markets
we serve. In the pharmacy benefit services industry, our competitors include
large national and regional pharmacy benefit managers and insurance companies
and managed care providers, some of which are owned by or have affiliations
with
our retail drug store competitors. As competition increases in the markets
in
which we operate, a significant increase in general pricing pressures could
occur, which could require us to reevaluate our pricing structures to remain
competitive. Our failure to reduce prices could result in decreased revenue,
and
reducing prices without also reducing costs could negatively affect
profits.
Reductions
in third-party reimbursement levels, from private or government plans, for
prescription drugs could reduce our margin on pharmacy sales and could have
a
significant effect on our retail drug store profits.
The
continued efforts of health maintenance organizations, managed care
organizations, pharmacy benefit management companies, government entities,
and
other third-party payors to reduce prescription drug costs and pharmacy
reimbursement rates may impact our profitability. Certain provisions of
the Deficit Reduction Act of 2005 seek to reduce federal spending by altering
the Medicaid reimbursement formula for multi-source (i.e., generic) drugs.
These
changes are expected to result in reduced Medicaid reimbursement rates for
retail pharmacies. Reduced reimbursement rates could adversely affect our
revenues and profits.
We
are subject to governmental regulations and procedures and other legal
requirements. A significant change in, or noncompliance with, these regulations,
procedures and requirements could have a material adverse effect on
profitability.
Our
retail drug store and pharmacy benefit services businesses are subject to
numerous federal, state and local regulations. Changes in these regulations
may
require extensive system and operating changes that may be difficult to
implement. Untimely compliance or noncompliance with applicable regulations
could result in the imposition of civil and criminal penalties that could
adversely affect the continued operation of our business, including: suspension
of payments from government programs; loss of required government
certifications; loss of authorizations to participate in or exclusion from
government reimbursement programs, such as the Medicare and Medicaid programs;
loss of licenses; or significant fines or monetary penalties, and could
adversely affect the continued operation of our
business.
The regulations to which we are subject include,
but are not limited to: federal, state and local registration and regulation
of
pharmacies; applicable Medicare and Medicaid regulations; the Health Insurance
Portability and Accountability Act, or HIPAA; accounting standards; tax laws
and
regulations; laws and regulations relating to the protection of the environment
and health and safety matters, including those governing exposure to, and the
management and disposal of, hazardous substances; regulations of the U.S. Food
and Drug Administration, the U.S. Federal Trade Commission, the Drug Enforcement
Administration, and the Consumer Product Safety Commission, as well as state
regulatory authorities, governing the sale, advertisement and promotion of
products we sell; anti-kickback laws; false claims laws; and federal and state
laws governing the practice of the profession of pharmacy. Furthermore, the
frequency and rate of FDA approval of new brand name and generic prescription
drugs or of additional existing prescription drugs for over-the-counter sales
could have an impact on our revenues and profitability. We are also
governed by federal and state laws of general applicability, including laws
regulating matters of working conditions, health and safety and equal employment
opportunity.
In
addition, we could have exposure if we are found to have infringed another
party's intellectual property rights.
Our
ability to hire and retain pharmacy personnel is important to the continued
success of our business.
As
our
business expands, we believe that our future success will depend greatly on
our
continued ability to attract and retain skilled and qualified pharmacists.
The
retail drug store industry is experiencing an ongoing shortage of licensed
pharmacists. This has resulted in continued upward pressure on pharmacist
compensation packages. Although we generally have been able to meet our
pharmacist staffing requirements in the past, any future inability to do so
could limit our ability to offer extended pharmacy hours and negatively impact
our revenue and our ability to deliver high levels of customer
service.
Should
a product liability issue or personal injury issue arise, inadequate product
or
other liability insurance coverage or our inability to maintain such insurance
may result in a material adverse effect on our business and financial
condition.
Products
that we sell could become subject to contamination, product tampering,
mislabeling or other damage. In addition, errors in the dispensing and packaging
of pharmaceuticals could lead to serious injury. Product liability or personal
injury claims may be asserted against us with respect to any of the products
or
pharmaceuticals we sell or services we provide. Should a product or other
liability issue arise, the coverage limits under our insurance programs and
the
indemnification amounts available to us may not be adequate to protect us
against claims. We also may not be able to maintain this insurance on acceptable
terms in the future. Damage to our reputation in the event of a product
liability or personal injury issue or judgment against us or a product recall
could have an adverse effect on our business, financial condition or results
of
operations.
Our
ability to grow our business may be constrained by our inability to find
suitable new store locations at acceptable prices or by the expiration of our
current leases.
Our
ability to grow our business may be constrained if suitable new store locations
cannot be identified with lease terms or purchase prices that are acceptable
to
us. We compete with other retailers and businesses for suitable locations for
our stores. Local land use and other regulations applicable to the types of
stores we desire to construct may impact our ability to find suitable locations
and influence the cost of constructing our stores. The expiration of leases
at
existing store locations may adversely affect us if the renewal terms of those
leases are unacceptable to us and we are forced to close or relocate stores.
Further, changing local demographics at existing store locations may adversely
affect revenue and profitability levels at those stores.
Changes
in economic conditions could adversely affect consumer buying practices and
reduce our revenues and profitability.
Our
performance may be negatively influenced by changes in national, regional or
local economic conditions and consumer confidence. External factors that affect
consumer confidence and over which we exercise no influence include unemployment
rates, levels of personal disposable income, national, regional or local
economic conditions, the introduction of new merchandise or brand and generic
prescription drugs, and acts of war or terrorism. Changes in economic conditions
and consumer confidence could adversely affect consumer preferences, purchasing
power and spending patterns. A decrease in overall consumer spending as a result
of changes in economic conditions could adversely affect our front-end sales.
Profit margins are greater on front-end sales than on pharmacy sales, and any
decrease in sales of front-end products would have a negative impact on our
profitability. Acts of war or terrorism may cause damage to our facilities,
disrupt the supply of the products and services we offer in our stores or
adversely impact consumer demand. All these factors could impact our revenues,
operating results and financial condition.
There
are a number of business risks which could adversely affect our financial
results.
Our
success depends on our ability to establish effective advertising, marketing
and
promotional programs. If we are unsuccessful in our advertising and
merchandising strategies, sales could be negatively affected. Our success also
depends on our continued ability to attract and retain store and management
personnel, and the loss of key personnel could have an adverse effect on the
results of our operations, financial condition or cash flow. Our results may
be
affected by our ability to successfully integrate acquired businesses into
our
company. The process of integrating acquired businesses may prove
disruptive to our operations, may distract management from overseeing our
existing operations and may take longer than anticipated. We also may not be
able to successfully and timely implement new computer systems and technology,
or may experience system disruptions or delays, which could adversely impact
our
operations and our ability to attract and retain customers. Furthermore, the
products we sell are sourced from a wide variety of domestic and international
vendors, and any future inability to find qualified vendors and access products
in a timely and efficient manner could adversely impact our
business.
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Item
1B.
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Unresolved
Staff Comments
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There
are no unresolved staff comments
outstanding with the Securities and Exchange Commission at this
time.
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Item
2.
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Properties
|
The
number and location of the company's stores appear in the listing of stores
by
state for fiscal 2007 and 2006 is listed below.
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State
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2007
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2006
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State
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2007
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2006
|
State
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2007
|
2006
|
||||||||||||||||||
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Alabama
|
67
|
56
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Maryland
|
38
|
31
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Oregon
|
47
|
44
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||||||||||||||||||
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Arizona
|
234
|
229
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Massachusetts
|
126
|
111
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Pennsylvania
|
83
|
65
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||||||||||||||||||
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Arkansas
|
45
|
36
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Michigan
|
190
|
174
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Rhode
Island
|
20
|
16
|
||||||||||||||||||
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California
|
476
|
438
|
Minnesota
|
111
|
103
|
South
Carolina
|
66
|
52
|
||||||||||||||||||
|
Colorado
|
130
|
113
|
Mississippi
|
51
|
41
|
South
Dakota
|
13
|
9
|
||||||||||||||||||
|
Connecticut
|
71
|
59
|
Missouri
|
165
|
152
|
Tennessee
|
213
|
199
|
||||||||||||||||||
|
Delaware
|
59
|
59
|
Montana
|
9
|
2
|
Texas
|
587
|
550
|
||||||||||||||||||
|
Florida
|
736
|
697
|
Nebraska
|
49
|
43
|
Utah
|
27
|
27
|
||||||||||||||||||
|
Georgia
|
125
|
111
|
Nevada
|
63
|
59
|
Vermont
|
2
|
2
|
||||||||||||||||||
|
Idaho
|
20
|
17
|
New
Hampshire
|
20
|
14
|
Virginia
|
72
|
56
|
||||||||||||||||||
|
Illinois
|
528
|
511
|
New
Jersey
|
101
|
90
|
Washington
|
106
|
95
|
||||||||||||||||||
|
Indiana
|
181
|
167
|
New
Mexico
|
54
|
53
|
West
Virginia
|
1
|
1
|
||||||||||||||||||
|
Iowa
|
59
|
55
|
New
York
|
117
|
84
|
Wisconsin
|
195
|
185
|
||||||||||||||||||
|
Kansas
|
57
|
50
|
North
Carolina
|
113
|
91
|
Wyoming
|
8
|
7
|
||||||||||||||||||
|
Kentucky
|
69
|
65
|
North
Dakota
|
1
|
1
|
Puerto
Rico
|
73
|
69
|
||||||||||||||||||
|
Louisiana
|
109
|
99
|
Ohio
|
223
|
198
|
|||||||||||||||||||||
|
Maine
|
1
|
-
|
Oklahoma
|
86
|
75
|
TOTAL
|
5,997
|
5,461
|
||||||||||||||||||
Most
of
the company's stores are leased. The leases are for various terms and
periods. See Note 3, "Leases" on page 29 of the 2007 Annual Report, which
section is incorporated herein by reference. The company owns
approximately 19.1% of the retail stores open at August 31, 2007. The
company has an aggressive expansion program of adding new
stores
and remodeling and relocating existing
stores. Net retail selling space was increased from 60.6 million
square feet at August 31, 2006, to 66.2 million square feet at August 31,
2007. Approximately 41.5% of company stores have been opened or
remodeled during the past five years.
The
company's retail store operations are supported by thirteen major distribution
centers with a total of approximately 9.7 million square feet of space in all
distribution centers, of which 7.0 million square feet is owned. The
remaining space is leased. All distribution centers are served by
modern 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. A new distribution in Anderson,
South Carolina opened in fiscal 2007. A new distribution center is scheduled
to
open in Windsor, Connecticut in fiscal 2009.
There
are
twenty principal office facilities containing approximately 2.3 million square
feet of which approximately 2.0 million square feet is owned and the remainder
is leased. The company operates three mail service facilities
containing approximately 252,000 square feet of which approximately 133,000
square feet is owned and the remainder is leased.
The
company also owns 22 strip shopping malls containing approximately 886,000
square feet of which approximately 609,000 square feet is leased to
others.
|
Item
3.
|
Legal
Proceedings
|
The
information in response to this item is incorporated herein by reference to
Note
8 "Contingencies" on page 31 of the 2007 Annual Report.
|
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.
PART
II
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
The
company's common stock is listed on the New York Stock Exchange, Chicago Stock
Exchange and The Nasdaq Stock Market LLC under the symbol WAG. As of
September 30, 2007 there were approximately 101,000 recordholders of company
common stock.
The
range
of the sales prices of the company's common stock by quarters during the two
years ended August 31, 2007, are incorporated herein by reference to the caption
"Common Stock Prices" on page 34 of the 2007 Annual Report.
The
company's cash dividends per common share during the two fiscal years ended
August 31 are as follows:
|
Quarter
Ended
|
2007
|
2006
|
||||||
|
November
|
$ |
.0775
|
$ |
.0650
|
||||
|
February
|
.0775
|
.0650
|
||||||
|
May
|
.0775
|
.0650
|
||||||
|
August
|
.0950
|
.0775
|
||||||
|
Fiscal
Year
|
$ |
.3275
|
$ |
.2725
|
||||
The
following table provides information about purchases by the company during
the
quarter ended August 31, 2007 of equity securities that are registered by the
company pursuant to Section 12 of the Exchange Act:
|
Issuer
Purchases of Equity Securities
|
||||||||||||||||
|
Period
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
(2)
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs (2)
|
||||||||||||
|
06/01/2007
- 06/30/2007
|
-
|
-
|
-
|
$ |
743,255,970
|
|||||||||||
|
07/01/2007-
07/31/2007
|
1,829,000
|
$ |
44.5954213
|
829,000
|
$ |
706,227,461
|
||||||||||
|
08/01/2007-08/31/2007
|
1,897,400
|
$ |
45.4321517
|
1,128,000
|
$ |
655,123,821
|
||||||||||
|
Total
|
3,726,400
|
$ |
45.0214658
|
1,957,000
|
$ |
655,123,821
|
||||||||||
|
(1)
|
The
company repurchased an aggregate of 1,769,400 shares of its common
stock
in open-market transactions to satisfy the requirements of the company's
employee stock purchase and option plans, as well as the company's
Nonemployee Director Stock Plan. These share repurchases were not
made
pursuant to a publicly announced repurchase plan or
program.
|
|
(2)
|
On
January 10, 2007, the Board of Directors approved a stock repurchase
program ("2007 repurchase program"), pursuant to which up to $1 billion
of
the company's common stock may be purchased prior to the expiration
date
of the program on January 10, 2011. This program was announced
in the company's report on Form 8-K, which was filed on January 11,
2007. The total remaining authorization under the repurchase
program was $655,123,821 as of August 31,
2007.
|
|
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 2007 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 through 23 of the 2007 Annual
Report.
|
Item
7A.
|
Qualitative
and Quantitative Disclosures 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
15.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None
|
Item
9A.
|
Controls
and Procedures
|
Based
on
their evaluation as of August 31, 2007 pursuant to Exchange Act Rule 13a-15(b),
the company's management, including its Chief Executive Officer and Chief
Financial Officer, believe the company's disclosure controls and procedures
(as
defined in Exchange Act Rule 13a-15(e)) are effective.
Management's
report on internal control and the attestation report of Deloitte & Touche
LLP, the company's independent registered public accounting firm, are included
in our Annual Report to Shareholders for the year ended August 31, 2007 and
are
incorporated in this Item 9A by reference. Our Annual Report to
Shareholders is included as an Exhibit to this Annual Report on Form
10-K.
In
connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the
company's internal control over financial reporting (as defined in Exchange
Act
Rule 13a-15(f)) by the company's management, including its Chief Executive
Officer and Chief Financial Officer, no changes during the quarter ended August
31, 2007 were identified that have materially affected, or are reasonably likely
to materially affect, the company's internal control over financial
reporting.
PART
III
The
information required for Items 10, 11, 12, 13 and 14, with the exception of
the
information relating to the executive officers of the Registrant, which is
presented below 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
Information
Concerning Corporate Governance, the Board of Directors and its
Committees
Compensation
of Directors
Executive
Compensation
Securities
Ownership of Certain Beneficial Owners and Management
Section
16(a) Beneficial Ownership Reporting Compliance
Equity
Compensation Plans
Certain
Relationships and Related Transactions
Independent
Registered Public Accounting Firm Fees and Services
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
following information is furnished with respect to each executive officer of
the
company as of October 15, 2007:
|
NAME
AND BUSINESS EXPERIENCE
|
AGE
|
OFFICE
HELD
|
||
|
Jeffrey
A. Rein
|
55
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Chairman
of the Board since July 2007
|
||||
|
Chief
Executive Officer since July 2006
|
||||
|
President
January 2003 to May 2007
|
||||
|
Chief
Operating Officer January 2003 to July 2006
|
||||
|
Executive
Vice President February 2001 to January 2003
|
||||
|
Director
since January 2003
|
||||
|
Gregory
D. Wasson
|
49
|
President
and Chief Operating Officer
|
||
|
President
and Chief Operating Officer since May 2007
|
||||
|
Executive
Vice President from October 2005 to April 2007
|
||||
|
Senior
Vice President February 2004 to October 2005
|
||||
|
Vice
President October 2001 to February 2004
|
||||
|
President,
Walgreens Health Initiatives, Inc. March 2002 to April
2007
|
||||
|
Executive
Vice President, Walgreens Health Initiatives, Inc. October 2001 to
March
2002
|
||||
|
Operations
Vice President February 1999 to October 2001
|
||||
|
George
J. Riedl
|
47
|
Executive
Vice President
|
||
|
Executive
Vice President since January 2006
|
||||
|
Senior
Vice President January 2003 to
January
2006
|
||||
|
Divisional
Vice President December 2001 to January 2003
|
||||
|
General
Merchandise Manager January 2000 to December 2001
|
||||
|
Trent
E. Taylor
|
50
|
Executive
Vice President
|
||
|
President,
Walgreens Health Initiatives, Inc. since May 2007
|
||||
|
Executive
Vice President since October 2005
|
||||
|
Senior
Vice President January 2002 to October 2005
|
||||
|
Chief
Information Officer January 1999 to April 2007
|
||||
|
Mark
A. Wagner
|
46
|
Executive
Vice President
|
||
|
Executive
Vice President since March 2006
|
||||
|
Senior
Vice President February 2002 to
March
2006
|
||||
|
Treasurer
February 2000 to February 2002
|
||||
EXECUTIVE
OFFICERS OF THE REGISTRANT – continued:
|
NAME
AND BUSINESS EXPERIENCE
|
AGE
|
OFFICE
HELD
|
||
|
R.
Bruce Bryant
|
57
|
Senior
Vice President
|
||
|
Senior
Vice President since September 2000
|
||||
|
Kermit
R. Crawford
|
48
|
Senior
Vice President
|
||
|
Senior
Vice President since September 2007
|
||||
|
Vice
President from October 2005 to September 2007
|
||||
|
Executive
Vice President, Walgreens Health Initiatives, Inc. since October
2005
|
||||
|
Vice
President, Walgreens Health Initiatives, Inc. September 2004 to October
2005
|
||||
|
Operations
Vice President October 2000 to September 2004
|
||||
|
Debra
M. Ferguson
|
50
|
Senior
Vice President
|
||
|
Senior
Vice President since February 2007
|
||||
|
Operations
Vice President April 2002 to April 2007
|
||||
|
John
W. Gleeson
|
61
|
Senior
Vice President
|
||
|
Senior
Vice President since February 2004
|
||||
|
Treasurer
February 2002 to April 2007
|
||||
|
Vice
President February 2000 to February 2004
|
||||
|
Dana
I. Green
|
57
|
Senior
Vice President, General Counsel and Corporate
|
||
|
Senior
Vice President, General Counsel and Corporate Secretary since January
2005
|
Secretary
|
|||
|
Senior
Vice President February 2004 to January 2005
|
||||
|
Vice
President May 2000 to February 2004
|
||||
|
William
M. Handal
|
58
|
Senior
Vice President
|
||
|
Senior
Vice President since March 2006
|
||||
|
Operations
Vice President September 2000 to
March
2006
|
||||
|
Donald
C. Huonker, Jr.
|
46
|
Senior
Vice President
|
||
|
|
Senior
Vice President since July 2007
|
|||
|
Vice
President from April 2006 to July 2007
|
||||
|
Vice
President, Pharmacy Services April 2005 to April 2006
|
||||
|
Operations
Vice President April 2003 to April 2005
|
||||
|
Director,
Drug Store Administration January 2002 to April 2003
|
||||
|
District
Manager-Special Assignment, SIMS Plus March 2001 to January
2002
|
||||
EXECUTIVE
OFFICERS OF THE REGISTRANT – continued:
|
NAME
AND BUSINESS EXPERIENCE
|
AGE
|
OFFICE
HELD
|
|
|
J.
Randolph Lewis
|
57
|
Senior
Vice President
|
|
|
Senior
Vice President since January 2000
|
|||
|
William
M. Rudolphsen
|
52
|
Senior
Vice President and Chief Financial Officer
|
|
|
Senior
Vice President and Chief Financial Officer since January
2004
|
|||
|
Controller
January 1998 to January 2004
|
|||
|
William
A. Shiel
|
57
|
Senior
Vice President
|
|
|
Senior
Vice President since July 1993
|
|||
|
Kevin
P. Walgreen
|
46
|
Senior
Vice President
|
|
|
Senior
Vice President since January 2006
|
|||
|
Operations
Vice President January 1995 to
January
2006
|
|||
|
Kenneth
R. Weigand
|
50
|
Senior
Vice President
|
|
|
Senior
Vice President since January 2007
|
|||
|
Vice
President January 2005 to January 2007
|
|||
|
Divisional
Vice President May 2000 to January 2005
|
|||
|
Stanley
B. Blaylock
|
44
|
Vice
President
|
|
|
Vice
President since October 2007
|
|||
|
Divisional
Vice President January 2007 to October 2007
|
|||
|
Senior
Vice President, Walgreens Health Services January 2007 to October
2007
|
|||
|
Vice
President, Specialty Pharmacy, Walgreens Health Services August 2006
to
January 2007
|
|||
|
President
and Chief Executive Officer, Medmark Inc. October 2005 to August
2006
|
|||
|
President,
Medmark Inc. June 2005 to October 2005
|
|||
|
Executive
Vice President, Chief Financial Officer and Chief Administrative
Officer,
Medmark Inc. August 2003 to June 2005
|
|||
|
Global
Co-Head of Healthcare Investment Banking, Deutsche Bank Alex. Brown
1999
to December 2002
|
|||
|
Mia
M. Scholz
|
41
|
Vice
President and Controller
|
|
|
Vice
President since October 2007
|
|||
|
Controller
since January 2004
|
|||
|
Divisional
Vice President January 2004 to October 2007
|
|||
|
Director
of Internal Audit November 1999 to January 2004
|
|||
|
Denise
K. Wong
|
49
|
Vice
President and Chief Information Officer
|
|
|
Vice
President and Chief Information Officer since May 2007
|
|||
|
Divisional
Vice President, December 2001 to May 2007
|
|||
EXECUTIVE
OFFICERS OF THE REGISTRANT – continued:
|
NAME
AND BUSINESS EXPERIENCE
|
AGE
|
OFFICE
HELD
|
|
|
Robert
G. Zimmerman
|
55
|
Vice
President
|
|
|
Vice
President since April 2006
|
|||
|
Chief
Administration and Finance Officer, Walgreens Health Initiatives,
Inc.
since April 2006
|
|||
|
Divisional
Vice President, Walgreens Health Initiatives, Inc. September 2001
to April
2006
|
|||
|
John
W. Spina
|
48
|
Treasurer
|
|
|
Treasurer
since April 2007
|
|||
|
Operations
Vice President April 2005 to April 2007
|
|||
|
Director,
Drug Store Administration April 2003 to April 2005
|
|||
|
District
Manager February 1996 to April 2003
|
|||
|
Chester
G. Young
|
62
|
General
Auditor
|
|
|
Divisional
Vice President since January 1995
|
|||
|
General
Auditor since June 1988
|
|||
Kevin
P.
Walgreen is the son of Charles R. Walgreen III, who is a director of the
company.
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement
Schedules
|
|
(a)
|
Documents
filed as part of this report
|
|
|
(1)
|
The
following financial statements, supplementary data, and report of
independent public accountants appearing in the 2007 Annual Report
are
incorporated herein by reference.
|
|
Annual
Report Page Number
|
|
|
Consolidated
Statements of Earnings and Shareholders' Equity for the years ended
August
31, 2007, 2006 and 2005
|
24
|
|
Consolidated
Balance Sheets at August 31, 2007 and 2006
|
25
|
|
Consolidated
Statements of Cash Flows for the years ended August 31, 2007, 2006
and
2005
|
26
|
|
Notes
to Consolidated Financial Statements
|
27-34
|
|
Management's
Report on Internal Control
|
35
|
|
Report
of Independent Registered Public Accounting Firm
|
35
|
|
|
(2)
|
The
following financial statement schedule and related report of the
independent registered public accounting firm is included
herein.
|
|
10-K
Page Number
|
|
|
Schedule
II Valuation and Qualifying
Accounts
|
22
|
|
Report
of Independent Registered Public Accounting Firm
|
23
|
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(r) constitute management contracts or compensatory
plans
or arrangements required to be filed as exhibits pursuant to Item
15(b) of
this Form 10-K.
|
|
(b)
|
Exhibits
|
|
2.
|
Agreement
and Plan of Merger, dated as of July 2, 2007, by and among Walgreen
Co.,
Bison Acquisition Sub Inc. and Option Care, Inc., filed with the
Securities and Exchange Commission on July 3, 2007 as Exhibit 2.1
to the
company’s Current Report on Form 8-K (File No. 1-00604), and incorporated
by reference herein.
|
||
|
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 (File No. 1-00604),
and
incorporated by reference herein.
|
|
|
(b)
|
By-Laws
of the company, as amended effective as of October 9, 2007, filed
with the
Securities and Exchange Commission on October 15, 2007 as Exhibit
3(b) to
the company's Current Report on Form 8-K (File No. 1-00604), and
incorporated by reference herein.
|
||
|
10.
|
(a)
|
Top
Management Long-Term Disability Plan, 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. 1-00604),
and
incorporated by reference herein.
|
|
10.
|
(b)
|
Executive
Short-Term Disability Plan Description, 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. 1-00604),
and
incorporated by reference herein.
|
||
|
(c)
|
Walgreen
Co. Management Incentive Plan (as restated effective September 1,
2003),
filed with the Securities and Exchange Commission as Exhibit 10(c)
to the
company's Annual Report on Form 10-K for the fiscal year ended August
31,
2003 (File No. 1-00604), and incorporated by reference
herein.
|
|||
|
(d)
|
(i)
|
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
(File No. 1-00604), and incorporated by reference
herein.
|
||
|
(ii)
|
Walgreen
Co. Restricted Performance Share Plan Amendment No. 5 (effective
October
9, 1996), 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, 2003 (File No. 1-00604), and incorporated by reference
herein.
|
|||
|
(iii)
|
Walgreen
Co. Restricted Performance Share Plan Amendment No. 6 (effective
October
11, 2006), 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
November 30, 2006 (File No. 1-00604), and incorporated by reference
herein.
|
|||
|
(iv)
|
Walgreen
Co. Long-Term Performance Incentive Plan (amendment and restatement
of the
Walgreen Co. Restricted Performance Share Plan), filed with the Securities
and Exchange Commission on January 11, 2007 as Exhibit 10.1 to the
company's Current Report on Form 8-K (File No. 1-00604), and incorporated
by reference herein.
|
|||
|
(v)
|
Walgreen
Co. Long-Term Performance Incentive Plan Amendment No. 1 (effective
January 10, 2007), filed with the Securities and Exchange Commission
as
Exhibit 10.2 to the company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 2007 (File No. 1-00604), and incorporated
by
reference herein.
|
|||
|
(e)
|
(i)
|
Walgreen
Co. Executive Stock Option Plan (effective January 11, 2006), as
amended
and restated, filed with the Securities and Exchange Commission on
January
17, 2006 as Exhibit 10.1 to the company's Current Report on Form
8-K (File
No. 1-00604), and incorporated by reference herein.
|
||
|
(ii)
|
Walgreen
Co. Executive Stock Option Plan Amendment No. 1 (effective October
11,
2006), 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, 2006 (File No. 1-00604), and incorporated by reference
herein.
|
|||
|
(iii)
|
Walgreen
Co. Executive Stock Option Plan Amendment No. 2 (effective September
1,
2007), filed with the Securities and Exchange Commission as Exhibit
10(e)(iii) to the company's Annual Report on Form 10-K for the fiscal
year
ended August 31, 2007.
|
|||
|
(iv)
|
Form
of Stock Option Agreement (Grades 12 through 17), filed with the
Securities and Exchange Commission as Exhibit 10(e)(ii) to the company's
Annual Report on Form 10-K for the fiscal year ended August 31, 2004
(File
No. 1-00604), and incorporated by reference herein.
|
|||
|
(v)
|
Form
of Stock Option Agreement (Grades 18 and above), filed with the Securities
and Exchange Commission as Exhibit 10(e)(iii) to the company's annual
Report on Form 10-K for the fiscal year ended August 31, 2004 (File
No.
1-00604), and incorporated by reference herein.
|
|||
|
(f)
|
(i)
|
Walgreen
Co. 1986 Director's Deferred Fee/Capital Accumulation Plan, 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.
1-00604), and incorporated by reference herein.
|
||
|
|
(n)
|
(i)
|
Walgreen
Co. Nonemployee Director Stock Plan, as amended and restated (effective
January 14, 2004), 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 29, 2004 (File No. 1-00604), and incorporated
by
reference herein.
|
WALGREEN
CO. AND SUBSIDIARIES
SCHEDULE
II--VALUATION AND QUALIFYING ACCOUNTS
FOR
THE YEARS ENDED AUGUST 31, 2007, 2006 AND 2005
(Dollars
in Millions)
|
Classification
|
Balance
at Beginning of Period
|
Additions
Charged to Costs and Expenses
|
Deductions
|
Balance
at End of Period
|
||||||||||||
|
Allowances
deducted from receivables for doubtful accounts -
|
||||||||||||||||
|
Year
Ended August 31, 2007
|
$ |
57.3
|
$ |
72.2
|
$ | (59.8 | ) | $ |
69.7
|
|||||||
|
Year
Ended August 31, 2006
|
$ |
45.3
|
$ |
58.3
|
$ | (46.3 | ) | $ |
57.3
|
|||||||
|
Year
Ended August 31, 2005
|
$ |
28.3
|
$ |
50.4
|
$ | (33.4 | ) | $ |
45.3
|
|||||||
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of Walgreen Co.:
We
have
audited the consolidated financial statements of Walgreen Co. and Subsidiaries
(the “Company”) as of August 31, 2007 and 2006, and for each of the three years
in the period ended August 31, 2007, and the Company’s internal control over
financial reporting as of August 31, 2007, and have issued our report thereon
dated October 26, 2007 (which report expresses an unqualified opinion and
includes an explanatory paragraph related to the adoption of Statement of
Financial Accounting Standards No. 158,
Employers’ Accounting for Defined
Benefit Pension and Other Retirement Plans – an amendment of FASB Statements No.
87, 88, 106, and 132 (R)
, and Statement of Financial Accounting Standards
No. 123(R),
Share-Based Payment
); such consolidated financial
statements and report are included in your 2007 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of the Company listed in Item 15.
This
consolidated financial statement schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion based on our audits.
In
our opinion, such consolidated financial statement schedule, when considered
in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
October
26, 2007
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/
|
William
M. Rudolphsen
|
Senior
Vice President and
|
Date:
October 26, 2007
|
|||
|
William
M. Rudolphsen
|
Chief
Financial Officer
|
|||||
SIGNATURES
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/
|
Jeffrey
A. Rein
|
Chairman
of the Board and
|
October 26, 2007 | |||
|
Jeffrey
A. Rein
|
Chief
Executive Officer
|
|||||
|
(Principal
Executive Officer)
|
||||||
|
/s/
|
William
M. Rudolphsen
|
Senior
Vice President and
|
October 26, 2007 | |||
|
William
M. Rudolphsen
|
Chief
Financial Officer
|
|||||
|
(Principal
Financial
|
||||||
|
Officer)
|
||||||
|
/s/
|
Mia
M. Scholz
|
Vice
President and Controller
|
October 26, 2007 | |||
|
Mia
M. Scholz
|
(Principal
Accounting Officer)
|
|||||
|
/s/
|
William
C. Foote
|
Director
|
October 26, 2007 | |||
|
William
C. Foote
|
||||||
|
/s/
|
James
J. Howard
|
Director
|
October 26, 2007 | |||
|
James
J. Howard
|
||||||
|
/s/
|
Alan
G. McNally
|
Director
|
October 26, 2007 | |||
|
Alan
G. McNally
|
||||||
|
/s/
|
Cordell
Reed
|
Director
|
October 26, 2007 | |||
|
Cordell
Reed
|
||||||
|
/s/
|
Nancy
M. Schlichting
|
Director
|
October 26, 2007 | |||
|
Nancy
M. Schlichting
|
||||||
|
/s/
|
David
Y. Schwartz
|
Director
|
October 26, 2007 | |||
|
David
Y. Schwartz
|
||||||
|
/s/
|
James
A. Skinner
|
Director
|
October 26, 2007 | |||
|
James
A. Skinner
|
||||||
|
/s/
|
Marilou
M. von Ferstel
|
Director
|
October 26, 2007 | |||
|
Marilou
M. von Ferstel
|
||||||
|
/s/
|
C.R.
Walgreen III
|
Director
|
October 26, 2007 | |||
|
C.R.
Walgreen III
|
Exhibit
10(e)(iii)
AMENDMENT
NUMBER TWO TO THE WALGREEN CO. EXECUTIVE STOCK OPTION PLAN
Effective
September 1, 2007, Section 5.4 of the Plan is amended in its entirety to read
as
follows:
|
|
“5.4.
|
Option
Price.
The Option price per Share under each Option
shall be reflected in the Option Agreement. The Option price
shall not be less than 100% of the fair market value, and in any
event not
less than the par value, of a Share on the designated grant date
for such
Option. For purposes of this Section 5.4 and the remaining
provisions of this Plan, fair market value means the closing price
on the
New York Stock Exchange Composite Transaction Tape on the relevant
valuation date (i.e., the designated grant date for purposes of the
Option
Price) or on the next preceding date on which a closing price was
quoted.”
|
EXHIBIT
13
WALGREEN
CO.
AND SUBSIDIARIES
ANNUAL
REPORT
FOR
THE YEAR ENDED AUGUST 31, 2007
TABLE
OF CONTENTS
Eleven
-Year
Summary of Selected Consolidated Financial
Data
Walgreen
Co. and Subsidiaries
(Dollars
in Millions, except per share amounts)
|
Fiscal
Year
|
2007
|
2006
|
2005
|
2004
|
||||||||||||
|
Net
Sales
|
$ |
53,762.0
|
$ |
47,409.0
|
$ |
42,201.6
|
$ |
37,508.2
|
||||||||
|
Costs
and Deductions
|
||||||||||||||||
|
Cost
of sales
|
38,518.1
|
34,240.4
|
30,413.8
|
27,310.4
|
||||||||||||
|
Selling,
occupancy and administration (1)
|
12,093.2
|
10,467.1
|
9,363.8
|
8,055.4
|
||||||||||||
|
Other
income (2)
|
38.4
|
52.6
|
31.6
|
17.3
|
||||||||||||
|
Total
Costs and Deductions
|
50,572.9
|
44,654.9
|
39,746.0
|
35,348.5
|
||||||||||||
|
Earnings
|
||||||||||||||||
|
Earnings
before income tax provision and cumulative effect of accounting
changes
|
3,189.1
|
2,754.1
|
2,455.6
|
2,159.7
|
||||||||||||
|
Income
tax provision
|
1,147.8
|
1,003.5
|
896.1
|
809.9
|
||||||||||||
|
Earnings
before cumulative effect of accounting changes
|
2,041.3
|
1,750.6
|
1,559.5
|
1,349.8
|
||||||||||||
|
Cumulative
effect of accounting changes (3)
|
-
|
-
|
-
|
-
|
||||||||||||
|
Net
Earnings
|
$ |
2,041.3
|
$ |
1,750.6
|
$ |
1,559.5
|
$ |
1,349.8
|
||||||||
|
Per
Common Share
(4)
|
||||||||||||||||
|
Net
earnings (3)
|
||||||||||||||||
|
Basic
|
$ |
2.04
|
$ |
1.73
|
$ |
1.53
|
$ |
1.32
|
||||||||
|
Diluted
|
2.03
|
1.72
|
1.52
|
1.31
|
||||||||||||
|
Dividends
declared
|
.33
|
.27
|
.22
|
.18
|
||||||||||||
|
Book
value
|
11.20
|
10.04
|
8.77
|
7.95
|
||||||||||||
|
Non-Current
Liabilities
|
||||||||||||||||
|
Long-term
debt
|
22.0
|
$ |
3.2
|
$ |
12.0
|
$ |
12.4
|
|||||||||
|
Deferred
income taxes
|
158.2
|
141.1
|
240.4
|
274.1
|
||||||||||||
|
Other
non-current liabilities
|
1,284.8
|
1,115.7
|
985.7
|
838.0
|
||||||||||||
|
Assets
and Equity
|
||||||||||||||||
|
Total
assets
|
$ |
19,313.6
|
$ |
17,131.1
|
$ |
14,608.8
|
$ |
13,342.1
|
||||||||
|
Shareholders'
equity
|
11,104.3
|
10,115.8
|
8,889.7
|
8,139.7
|
||||||||||||
|
Return
on average shareholders' equity
|
19.2 | % | 18.4 | % | 18.3 | % | 17.7 | % | ||||||||
|
Locations
|
||||||||||||||||
|
Year-end
(5)
|
5,997
|
5,461
|
4,985
|
4,613
|
||||||||||||
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
1997
|
||||||||||||||||||||
| $ |
32,505.4
|
$ |
28,681.1
|
$ |
24,623.0
|
$ |
21,206.9
|
$ |
17,838.8
|
$ |
15,306.6
|
$ |
13,363.0
|
|||||||||||||
|
23,706.2
|
21,076.1
|
18,048.9
|
15,465.9
|
12,978.6
|
11,139.4
|
9,681.8
|
||||||||||||||||||||
|
6,938.3
|
5,992.5
|
5,171.0
|
4,501.2
|
3,859.6
|
3,341.6
|
2,979.6
|
||||||||||||||||||||
|
10.8
|
6.9
|
2.3
|
5.7
|
11.9
|
41.9
|
3.9
|
||||||||||||||||||||
|
30,633.7
|
27,061.7
|
23,217.6
|
19,961.4
|
16,826.3
|
14,439.1
|
12,657.5
|
||||||||||||||||||||
|
1,871.7
|
1,619.4
|
1,405.4
|
1,245.5
|
1,012.5
|
867.5
|
705.5
|
||||||||||||||||||||
|
706.6
|
611.3
|
530.6
|
479.5
|
397.4
|
336.2
|
273.4
|
||||||||||||||||||||
|
1,165.1
|
1,008.1
|
874.8
|
766.0
|
615.1
|
531.3
|
432.1
|
||||||||||||||||||||
|
-
|
-
|
-
|
-
|
-
|
(26.4 | ) |
-
|
|||||||||||||||||||
| $ |
1,165.1
|
$ |
1,008.1
|
$ |
874.8
|
$ |
766.0
|
$ |
615.1
|
$ |
504.9
|
$ |
432.1
|
|||||||||||||
| $ |
1.14
|
$ |
.99
|
$ |
.86
|
$ |
.76
|
$ |
.61
|
$ |
.50
|
$ |
.43
|
|||||||||||||
|
1.13
|
.98
|
.85
|
.75
|
.61
|
.50
|
.43
|
||||||||||||||||||||
|
.16
|
.15
|
.14
|
.14
|
.13
|
.13
|
.12
|
||||||||||||||||||||
|
6.94
|
6.01
|
5.05
|
4.14
|
3.44
|
2.83
|
2.38
|
||||||||||||||||||||
| $ |
9.4
|
$ |
11.2
|
$ |
20.8
|
$ |
18.2
|
$ |
18.0
|
$ |
13.6
|
$ |
3.3
|
|||||||||||||
|
180.7
|
135.6
|
102.9
|
74.0
|
54.1
|
74.2
|
101.6
|
||||||||||||||||||||
|
677.5
|
613.9
|
547.5
|
519.2
|
461.0
|
410.3
|
310.0
|
||||||||||||||||||||
| $ |
11,656.8
|
$ |
10,117.2
|
$ |
9,042.3
|
$ |
7,103.7
|
$ |
5,906.7
|
$ |
4,901.6
|
$ |
4,207.1
|
|||||||||||||
|
7,117.8
|
6,162.9
|
5,151.0
|
4,188.6
|
3,449.8
|
2,823.4
|
2,353.7
|
||||||||||||||||||||
| 17.5 | % | 17.8 | % | 18.7 | % | 20.1 | % | 19.6 | % | 19.5 | % | 19.7 | % | |||||||||||||
|
4,252
|
3,899
|
3,536
|
3,181
|
2,830
|
2,556
|
2,366
|
||||||||||||||||||||
|
(1)
|
Fiscal
2007 had insignificant pre-tax income from litigation settlement
gains. Fiscal 2006, 2005, 2004, 2003, 2002, 2001 and 2000
included pre-tax income of $7.3 million ($.005 per share, diluted),
$26.3
million ($.016 per share, diluted), $16.3 million ($.010 per share,
diluted), $29.6 million ($.018 per share, diluted), $6.2 million
($.004
per share, diluted), $22.1 million ($.013 per share, diluted) and
$33.5
million ($.021 per share, diluted), respectively, from litigation
settlements. Fiscal 2006 included a $12.3 million ($.008 per share,
diluted) downward adjustment of the fiscal 2005 pre-tax expenses
of $54.7
million ($.033 per share, diluted) related to Hurricane
Katrina.
|
|
(2)
|
Fiscal
1998 includes a pre-tax gain of $37.4 million ($.023 per share, diluted)
from the sale of the company's long-term care pharmacy
business.
|
|
(3)
|
Fiscal
1998 includes an after-tax $26.4 million ($.026 per share, diluted)
charge
from the cumulative effect of accounting change for system development
costs.
|
|
(4)
|
Per
share amounts have been adjusted for two-for-one stock splits in
1999 and
1997.
|
|
(5)
|
Locations
include stores, mail service facilities, home care facilities and
specialty pharmacies.
|
MANAGEMENT'S
DISCUSSION
AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Introduction
Walgreens
is principally a retail drugstore chain that sells prescription and
non-prescription drugs and general merchandise. General merchandise includes,
among other things, beauty care, personal care, household items, candy,
photofinishing, greeting cards, seasonal items and convenience
food. Customers can have prescriptions filled at the drugstore
counter, as well as through the mail, by telephone and via the
Internet. As of August 31, 2007, we operated 5,997 locations
(including three mail service facilities, 101 home care facilities and eight
specialty pharmacies) located in 48 states and Puerto Rico. The total
location count of 5,997 does not include the 62 convenient care clinics operated
by Take Care Health Systems, Inc.
The
drugstore industry is highly competitive. In addition to other
drugstore chains, independent drugstores and mail order prescription providers,
we also compete with various other retailers including grocery stores,
convenience stores, mass merchants and dollar stores.
Prescription
sales continue to become a larger portion of the company's
business. The long-term outlook for prescription sales is strong due
in part to the aging population, the introduction of lower priced generics
and
the continued development of innovative drugs that improve quality of life
and
control healthcare costs. Certain provisions relating to
Medicaid reimbursement rates for generic drugs from the Deficit Reduction Act
of
2005 become effective during fiscal 2008 and are expected to reduce our
reimbursement.
Front-end
sales have continued to grow due to strengthening core categories, such as
over-the-counter non-prescription drugs, beauty care and personal care
products. Walgreens strong name recognition continues to drive
private brand sales, which are included in these core categories.
We
continue to expand into new markets and increase penetration in existing
markets. To support our growth, we are investing significantly in prime
locations, technology and customer service initiatives. Retail
organic growth continues to be our primary growth vehicle; however,
consideration is given to acquisitions that provide a unique opportunity and
strategic fit for our business. Fiscal 2007 acquisitions included
Option Care, Inc. and affiliated companies, a specialty pharmacy and home
infusion services provider; Take Care Health Systems, Inc. and LLC, a convenient
care clinic operator; selected assets from Familymeds Group, Inc., a pharmacy
chain; the remaining minority interest in SeniorMed LLC and selected other
assets (primarily prescription files).
Operating
Statistics
|
Percentage
Increases
|
||||||||||||
|
Fiscal
Year
|
2007
|
2006
|
2005
|
|||||||||
|
Net
Sales
|
13.4
|
12.3
|
12.5
|
|||||||||
|
Net
Earnings
|
16.6
|
12.3
|
15.5
|
|||||||||
|
Comparable
Drugstore Sales
|
8.1
|
7.7
|
8.2
|
|||||||||
|
Prescription
Sales
|
14.7
|
13.3
|
13.4
|
|||||||||
|
Comparable
Drugstore Prescription Sales
|
9.5
|
9.2
|
9.8
|
|||||||||
|
Front-End
Sales
|
12.2
|
10.9
|
11.1
|
|||||||||
|
Comparable
Drugstore Front-End Sales
|
5.8
|
5.3
|
5.5
|
|||||||||
|
Percent
to Net Sales
|
||||||||||||
|
Fiscal
Year
|
2007
|
2006
|
2005
|
|||||||||
|
Gross
Margin
|
28.4
|
27.8
|
27.9
|
|||||||||
|
Selling,
Occupancy and Administration Expenses
|
22.5
|
22.1
|
22.2
|
|||||||||
|
Other
Statistics
|
||||||||||||
|
Fiscal
Year
|
2007
|
2006
|
2005
|
|||||||||
|
Prescription
Sales as a % of Net Sales
|
65.0
|
64.3
|
63.7
|
|||||||||
|
Third
Party Sales as a % of Total Prescription Sales
|
94.8
|
93.1
|
92.7
|
|||||||||
|
Total
Number of Prescriptions
(In
Millions)
|
583.4
|
530.0
|
489.4
|
|||||||||
|
Total
Number of Locations (1)
|
5,997
|
5,461
|
4,985
|
|||||||||
|
(1)
The total number of locations for fiscal year 2005 has been adjusted
to
include home care locations for consistency.
|
||||||||||||
Results
of Operations
Fiscal
2007 was our 33rd consecutive year of record sales and
earnings. Fiscal year net earnings increased 16.6% to $2.041 billion,
or $2.03 per share (diluted), versus last year's earnings of $1.751 billion,
or
$1.72 per share (diluted). Net earnings increases resulted from improved sales
and higher gross margins, partially offset by higher expense
ratios.
Fiscal
2007 included insignificant pre-tax litigation settlement
gains. There were pre-tax litigation settlement gains of $7.3 million
(less than $.01 per share, diluted) in fiscal 2006 and $26.3 million ($.02
per
share, diluted) in fiscal 2005. Fiscal 2006 included a $12.3 million
(less than $.01 per share, diluted) downward adjustment of the fiscal 2005
pre-tax expenses of $54.7 million ($.03 per share, diluted) related to Hurricane
Katrina.
Net
sales
increased by 13.4% to $53.762 billion in fiscal 2007 compared to increases
of
12.3% in 2006 and 12.5% in 2005. Drugstore sales increases resulted
from sales gains in existing stores and added sales from new stores, each of
which includes an indeterminate amount of market-driven price changes. Sales
in
comparable drugstores were up 8.1% in 2007, 7.7% in 2006 and 8.2% in
2005. Comparable drugstores are defined as those that have been open
for at least twelve consecutive months without closure for seven or more
consecutive days and without a major remodel or a natural disaster in the past
twelve months. Relocated and acquired stores are not included as
comparable stores for the first twelve months after the relocation or
acquisition. We operated 5,997 locations at August 31, 2007, compared to 5,461
at August 31, 2006, and 4,985 at August 31, 2005.
Prescription
sales increased 14.7% in 2007, 13.3% in 2006 and 13.4% in
2005. Comparable drugstore prescription sales were up 9.5% in 2007,
9.2% in 2006 and 9.8% in 2005. Prescription sales were 65.0% of total
net sales for fiscal 2007 compared to 64.3% in 2006 and 63.7% in
2005. The effect of generic drugs introduced during the fiscal year,
which replaced higher priced retail brand name drugs, reduced prescription
sales
by 4.2% for 2007, 2.0% for 2006 and 2.4% for 2005 while the effect on total
sales was 2.5% for 2007, 1.2% for 2006 and 1.4% for 2005. Third party
sales, where reimbursement is received from managed care organizations, the
government or private insurers, were 94.8% of prescription sales in 2007, 93.1%
in 2006 and 92.7% in 2005. The total number of prescriptions filled
was approximately 583.4 million in 2007; 530.0 million in 2006 and 489.4 million
in 2005.
Front-end
sales increased 12.2% in 2007, 10.9% in 2006 and 11.1% in
2005. Front-end sales were 35.0% of total sales in fiscal 2007, 35.7%
in 2006 and 36.3% in 2005. Comparable front-end sales increased 5.8%
in 2007, 5.3% in 2006 and 5.5% in 2005.
Gross
margins as a percent of total net sales were 28.4% in 2007, 27.8% in 2006 and
27.9% in 2005. Pharmacy margins, as well as front-end margins, increased for
the
year. Pharmacy margins increased with the growth in generic drug
sales. Some of that benefit was offset by growth in Medicare Part D
and third party pharmacy sales, which typically have lower margins than cash
prescriptions, and a continued sales shift toward the pharmacy business, which
carries lower margins than front-end merchandise. Margins for the front-end
increased as a result of a shift in sales mix to higher margin
items.
We
use
the last-in, first-out (LIFO) method of inventory valuation. The LIFO
provision is dependent upon inventory levels, inflation rates and merchandise
mix. The effective LIFO inflation rates were 1.04% in 2007, 1.53% in
2006 and 1.26% in 2005, which resulted in charges to cost of sales of $69.3
million in 2007, $95.3 million in 2006 and $67.8 million in
2005. Inflation on prescription inventory was .71% in 2007, 2.37% in
2006 and 2.18% in 2005. In all three fiscal years, we experienced
deflation in some non-prescription inventories.
Selling,
occupancy and administration expenses were 22.5% of sales in fiscal 2007, 22.1%
in fiscal 2006 and 22.2% in fiscal 2005. The increase in fiscal 2007
was principally caused by higher store level salaries and expenses, provisions
for legal matters and higher intangible asset amortization and administrative
costs related to acquisitions. In addition, the impact of the
introduction of new generic drugs, which tempers the rate of sales growth,
continues to adversely affect expense ratios.
Interest
income decreased in 2007 as cash was used for business acquisitions and stock
repurchases, reducing the level of short-term investments. Interest
income is also reported net of an insignificant level of interest
expense. Average net investment levels were approximately $805.9
million in 2007, $1.225 billion in 2006 and $1.307 billion in 2005.
The
effective income tax rate was 36.0% for fiscal 2007, 36.4% for 2006 and 36.5%
for 2005. Fiscal 2007 reflects the resolution of a multiyear state
tax matter and a lower effective state tax rate, while 2006 reflects the
settlement of prior years' Internal Revenue Service matters and 2005 reflects
foreign tax credit adjustments.
Critical
Accounting Policies
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and include
amounts based on management's prudent judgments and estimates. Actual
results may differ from these estimates. Management believes that any
reasonable deviation from those judgments and estimates would not have a
material impact on our consolidated financial position or results of
operations. To the extent that the estimates used differ from actual
results, however, adjustments to the statement of earnings and corresponding
balance sheet accounts would be necessary. These adjustments would be
made in future statements. Some of the more significant estimates
include goodwill and other intangible asset impairment, allowance for doubtful
accounts, vendor allowances, liability for closed locations, liability for
insurance claims and cost of sales. We use the following methods to
determine our estimates:
Goodwill
and other intangible asset impairment –
Goodwill
and other indefinite-lived intangible assets are not amortized, but are
evaluated for impairment annually or whenever events or changes in circumstances
indicate that the value of a certain asset may be impaired. The
process of evaluating goodwill for impairment involves the determination of
fair
value. Inherent in such fair value determinations are certain
judgments and estimates, including the interpretation of economic indicators
and
market valuations and assumptions about our business plans. We have
not made any material changes to the method of evaluating goodwill and
intangible asset impairments during the last three years. Based on
current knowledge, we do not believe there is a reasonable likelihood that
there
will be a material change in the estimate or assumptions used to determine
impairment.
Allowance
for doubtful accounts –
The
provision for bad debt is based on both specific receivables and historic
write-off percentages. We have not made any material changes to the
method of estimating our allowance for doubtful accounts during the last three
years. Based on current knowledge, we do not believe there is a
reasonable likelihood that there will be a material change in the estimate
or
assumptions used to determine the allowance.
Vendor
allowances –
Vendor
allowances are principally received as a result of purchase levels, sales or
promotion of vendors' products. Allowances are generally recorded as
a reduction of inventory and are recognized as a reduction of cost of sales
when
the related merchandise is sold. Those allowances received for
promoting vendors' products are offset against advertising expense and result
in
a reduction of selling, occupancy and administration expense to the extent
of
advertising incurred, with the excess treated as a reduction of inventory costs.
We have not made any material changes to the method of estimating our vendor
allowances during the last three years. Based on current knowledge,
we do not believe there is a reasonable likelihood that there will be a material
change in the estimate or assumptions used to determine vendor
allowances.
Liability
for closed locations –
The
liability is based on the present value of future rent obligations and other
related costs (net of estimated sublease rent) to the first lease option
date. We have not made any material changes to the method of
estimating our liability for closed locations during the last three
years. Based on current knowledge, we do not believe there is a
reasonable likelihood that there will be a material change in the estimate
or
assumptions used to determine the liability.
Liability
for insurance claims –
The
liability for insurance claims is recorded based on estimates for claims
incurred. The provisions are estimated in part by considering
historical claims experience, demographic factors and other actuarial
assumptions and are not discounted. We have not made any material
changes to the method of estimating our liability for insurance claims during
the last three years. Based on current knowledge, we do not believe there is
a
reasonable likelihood that there will be a material change in the estimate
or
assumptions used to determine the liability.
Cost
of
sales –
Drugstore
cost of sales is derived based on point-of-sale scanning information with an
estimate for shrinkage and adjusted based on periodic inventories. Inventories
are valued at the lower of cost or market determined by the last-in, first-out
(LIFO) method. We have not made any material changes to the method of
estimating cost of sales during the last three years. Based on
current knowledge, we do not believe there is a reasonable likelihood that
there
will be a material change in the estimate or assumptions used to determine
cost
of sales.
Liquidity
and Capital Resources
Cash
and
cash equivalents were $254.8 million at August 31, 2007, compared to $919.9
million at August 31, 2006. Short-term investment objectives are to
minimize risk, maintain liquidity and maximize after-tax yields. To
attain these objectives, investment limits are placed on the amount, type and
issuer of securities. Investments are principally in top-tier money
market funds and commercial paper.
Net
cash
provided by operating activities was $2.357 billion in fiscal 2007 and $2.440
billion in fiscal 2006. The change between periods was primarily caused by
increased net earnings, offset by inventory levels. The lower rate of increase
in accounts receivable, as well as the decrease in accounts payable, reflect
the
loss of the UnitedHealth Group's Ovations unit contract in our pharmacy benefit
management business as of December 31, 2006. Cash provided by
operations is the principal source of funds for expansion, acquisitions,
remodeling programs, dividends to shareholders and stock
repurchases. In fiscal 2007, we supplemented cash provided by
operations with short-term borrowings.
Net
cash
used for investing activities was $2.396 billion versus $1.684 billion last
year. Proceeds from the sale of auction rate securities exceeded
purchases of such securities by $429.1 million in fiscal 2007 compared to $106.0
million in fiscal 2006. Our participation in auction rate securities
has included investing in municipal bonds and student obligations, with
purchases of these securities at par. While the underlying security
is issued as a long-term investment, they typically can be purchased and sold
every 7, 28 and 35 days. The trading of auction rate securities takes
place through a descending price auction with the interest rate reset at the
beginning of each holding period. At the end of each holding period
the interest is paid to the investor. At August 31, 2007, there were
no holdings of auction rate securities compared to $415.1 million in fiscal
2006.
Additions
to property and equipment were $1.785 billion compared to $1.338 billion last
year. In total there were 563 new or relocated locations (net 478) in
fiscal 2007, not including 58 locations acquired from Option Care, Inc. and
affiliated companies. This compared to 570 last year (net 476). New
locations are owned or leased. There were 170 owned locations added
during the year and 62 under construction at August 31, 2007, versus 136 owned
locations added and 62 under construction as of August 31, 2006.
Business
acquisitions this year were $1.086 billion versus $485.4 million in fiscal
2006. Acquisitions in fiscal 2007 included the purchase of Option
Care, Inc. and affiliated companies, a specialty pharmacy and home infusion
services provider; Take Care Health Systems, Inc. and LLC, a convenient care
clinic operator; selected assets from Familymeds Group, Inc., a pharmacy chain;
the remaining minority interest in SeniorMed LLC and selected other assets
(primarily prescription files). Business acquisitions in fiscal 2006
included a merger with Delaware-based Happy Harry's pharmacy chain and the
purchase of Medmark Inc., a specialty pharmacy; Schraft's A Specialty
Pharmacy; a controlling interest in SeniorMed LLC, an institutional pharmacy;
Home Pharmacy of California, which provides home infusion services; Canadian
Valley Medical Solutions, which provides home care services; selected assets
from the 23-store Medic drugstore chain and selected other assets (primarily
prescription files).
Capital
expenditures for fiscal 2008 are expected to be more than $2.0 billion,
excluding business acquisitions. We expect to open 550 new stores in
fiscal 2008, with a net increase of more than 475 stores, and anticipate having
a total of more than 7,000 locations in 2010. We are continuing to
relocate stores to more convenient and profitable freestanding
locations. In addition to new stores, expenditures are planned for
distribution centers and technology. A new distribution center opened
in Anderson, South Carolina, in fiscal 2007; another in Windsor, Connecticut,
has an anticipated opening date in fiscal 2009.
Net
cash
used for financing activities was $626.1 million compared to $413.0 million
last
year. During the fiscal year, we purchased $1.064 billion of company
shares. Of this amount, $343.2 million related to the stock
repurchase program announced on July 14, 2004 ("2004 repurchase program") and
finalized in the first quarter of fiscal 2007. On January 10, 2007, a new stock
repurchase program ("2007 repurchase program") of up to $1 billion was
announced, to be executed over the next four years. Purchases of
company shares relating to the 2007 repurchase program were made in the second,
third and fourth quarters in the amount of $344.9 million. An
additional $375.4 million of shares were purchased to support the needs of
the
employee stock plans. Comparable amounts in fiscal 2006 were
purchases of $289.7 million relating to the 2004 repurchase program
and purchases of $379.1 million to support the needs of the employee stock
plans. We had proceeds related to employee stock plans
of $266.1 million in fiscal 2007 versus $319.1 million in fiscal
2006. We do not anticipate executing stock repurchases under the 2007
repurchase program while having short-term debt outstanding; however, we will
continue to repurchase shares to support the needs of the employee stock
plans.
We
had
$850.0 million of commercial paper outstanding at a weighted-average interest
rate of 5.36% at August 31, 2007. In connection with our commercial paper
program, we maintain two unsecured backup syndicated lines of credit that total
$1.2 billion. The first $600 million facility expires on August 12,
2008, the second on August 12, 2012. Our ability to access these
facilities is subject to our compliance with the terms and conditions of the
credit facilities, including financial covenants. The covenants
require us to maintain certain financial ratios related to minimum net worth
and
priority debt, along with limitations on the sale of assets and purchases of
investments. As of August 31, 2007, we were in compliance with all
such covenants. There were no borrowings against the credit
facilities in fiscal 2007. On October 12, 2007, we entered into an
additional $100 million unsecured line of credit facility that expires on
December 31, 2007. This line of credit is subject to similar
covenants as the syndicated lines of credit. In connection with the
Option Care, Inc. and affiliated companies acquisition, $118.3 million of
convertible debt was retired prior to August 31, 2007, while $28.5 million
remained outstanding as of that date. On September 6, 2007, the $28.5
million was retired.
Cash
dividends paid were $310.2 million for fiscal 2007 versus $262.9 million in
fiscal 2006. A $213.9 million wire transfer made on August 31, 2006, was not
accepted by our disbursement bank until September 1, 2006, resulting in a bank
overdraft at fiscal 2006 year-end and subsequent repayment on September 1,
2006.
Our
credit ratings as of August 31, 2007, were as follows:
|
Rating
Agency
|
Long-Term
Debt Rating
|
Outlook
|
Commercial
Paper Rating
|
Outlook
|
|
Moody's
|
Aa3
|
Negative
|
P-1
|
Stable
|
|
Standard
& Poor's
|
A+
|
Stable
|
A-1
|
Stable
|
In
assessing our credit strength, both Moody's and Standard & Poor's consider
our business model, capital structure, financial policies and financial
statements. Our credit ratings impact our borrowing costs, access to
capital markets and operating lease costs.
Contractual
Obligations and Commitments
The
following table lists our contractual obligations and commitments at August
31,
2007 (In Millions):
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
Than 1 Year
|
1-3
Years
|
3-5
Years
|
Over
5 Years
|
||||||||||||||||
|
Operating
leases (1)
|
$ |
28,710.5
|
$ |
1,609.9
|
$ |
3,365.5
|
$ |
3,292.1
|
$ |
20,443.0
|
||||||||||
|
Purchase
obligations (2):
|
||||||||||||||||||||
|
Open
inventory purchase orders
|
1,591.8
|
1,591.8
|
-
|
-
|
-
|
|||||||||||||||
|
Real
estate development
|
980.4
|
978.8
|
1.6
|
-
|
-
|
|||||||||||||||
|
Other
corporate obligations
|
619.8
|
283.9
|
262.1
|
37.5
|
36.3
|
|||||||||||||||
|
Insurance*
|
482.9
|
144.2
|
112.8
|
61.1
|
164.8
|
|||||||||||||||
|
Retiree
health*
|
370.0
|
8.4
|
20.5
|
25.5
|
315.6
|
|||||||||||||||
|
Closed
location obligations*
|
67.1
|
18.2
|
20.7
|
12.3
|
15.9
|
|||||||||||||||
|
Capital
lease obligations*
|
39.7
|
1.2
|
2.3
|
2.7
|
33.5
|
|||||||||||||||
|
Other
long-term liabilities reflected on the balance sheet*
|
564.4
|
45.3
|
72.5
|
56.0
|
390.6
|
|||||||||||||||
|
Total
|
$ |
33,426.6
|
$ |
4,681.7
|
$ |
3,858.0
|
$ |
3,487.2
|
$ |
21,399.7
|
||||||||||
*Recorded
on balance
sheet.
|
(1)
|
Amounts
for operating leases and capital leases do not include certain operating
expenses under these leases such as common area maintenance, insurance
and
real estate taxes. These expenses for the company's most recent
fiscal year were $255.6 million.
|
|
(2)
|
Purchase
obligations include agreements to purchase goods or services that
are
enforceable and legally binding and that specify all significant
terms,
including open purchase orders.
|
Off-Balance
Sheet Arrangements
Letters
of credit are issued to support purchase obligations and commitments (as
reflected on the Contractual Obligations and Commitments table) as follows
(In
Millions):
|
Inventory
obligations
|
$ |
76.9
|
||
|
Real
estate development
|
12.2
|
|||
|
Insurance
|
276.8
|
|||
|
Total
|
$ |
365.9
|
We
have
no other off-balance sheet arrangements other than those disclosed on the
Contractual Obligations and Commitments table and a credit agreement guaranty
on
behalf of SureScripts, LLC. This agreement is described more fully in
Note 8 in the Notes to Consolidated Financial Statements.
Both
on-balance sheet and off-balance sheet financing are considered when targeting
debt to equity ratios to balance the interests of equity and debt (including
real estate) investors. This balance allows us to lower our cost of
capital while maintaining a prudent level of financial risk.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation
of
FASB Statement No. 109." This interpretation clarifies the accounting
and disclosure for uncertain income tax positions, including how income tax
positions should be reflected in the financial statements before they are
resolved with the tax authorities. This interpretation will be
effective first quarter of fiscal 2008. Had this pronouncement been effective
as
of August 31, 2007, the adjustment to Retained Earnings would have been
immaterial.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This statement defines and
provides guidance when applying fair value measurements to accounting
pronouncements that require or permit such measurements. This
statement, which will be effective first quarter of fiscal 2009, is not expected
to have a material impact on our consolidated financial position or results
of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” This statement gives entities the
option to carry most financial assets and liabilities at fair value, with
changes in fair value recorded in earnings. We are currently evaluating whether
we intend to adopt this voluntary statement, which would be effective first
quarter of fiscal 2009.
In
June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards.” EITF 06-11 states that an entity should recognize a realized tax
benefit associated with dividends on certain nonvested equity shares and options
as an increase in additional paid-in capital. The benefit should be included
in
the pool of excess tax benefits available to absorb potential future tax
liabilities. This issue should be applied prospectively for share-based awards
declared beginning in fiscal 2009. The company does not expect the adoption
of
EITF 06-11 to have a material impact on its consolidated financial position
or
results of operations.
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. Please
see Walgreen Co.'s Form 10-K for the period ended August 31, 2007, for a
discussion of important factors as they relate to forward-looking
statements. Actual results could differ materially.
Consolidated
Statements
of Earnings
Walgreen
Co. and Subsidiaries
For
the
Years Ended August 31, 2007, 2006 and 2005
(In
Millions, except shares and per share amounts)
|
Earnings
|
2007
|
2006
|
2005
|
|||||||||
|
Net
Sales
|
$ |
53,762.0
|
$ |
47,409.0
|
$ |
42,201.6
|
||||||
|
Costs
and Deductions:
|
||||||||||||
|
Cost
of sales
|
38,518.1
|
34,240.4
|
30,413.8
|
|||||||||
|
Selling,
occupancy and administration
|
12,093.2
|
10,467.1
|
9,363.8
|
|||||||||
|
50,611.3
|
44,707.5
|
39,777.6
|
||||||||||
|
Other
Income:
|
||||||||||||
|
Interest
income, net
|
38.4
|
52.6
|
31.6
|
|||||||||
|
Earnings:
|
||||||||||||
|
Earnings
before income tax provision
|
3,189.1
|
2,754.1
|
2,455.6
|
|||||||||
|
Income
tax provision
|
1,147.8
|
1,003.5
|
896.1
|
|||||||||
|
Net
Earnings
|
$ |
2,041.3
|
$ |
1,750.6
|
$ |
1,559.5
|
||||||
|
Net
Earnings per Common Share:
|
||||||||||||
|
Basic
|
$ |
2.04
|
$ |
1.73
|
$ |
1.53
|
||||||
|
Diluted
|
2.03
|
1.72
|
1.52
|
|||||||||
|
Average
shares outstanding
|
998,633,559
|
1,010,252,562
|
1,019,669,630
|
|||||||||
|
Dilutive
effect of stock options
|
7,706,509
|
9,148,162
|
8,664,212
|
|||||||||
|
Average
shares outstanding assuming dilution
|
1,006,340,068
|
1,019,400,724
|
1,028,333,842
|
|||||||||
The
accompanying Notes to Consolidated Financial Statements are integral parts
of
these statements.
Consolidated
Statements
of Shareholders'
Equity
Walgreen
Co. and Subsidiaries
For
the
Years Ended August 31, 2007, 2006 and 2005
(In
Millions, except shares and per share amounts)
|
Shareholders'
Equity
|
Common
Stock Shares
|
Common
Stock Amount
|
Paid-In
Capital
|
Employee
Stock Loan Receivable
|
Retained
Earnings
|
Accumulated
Other Comprehensive Loss
|
Common
Stock In Treasury
|
|||||||||||||||||||||
|
Balance,
August 31, 2004
|
1,023,292,737
|
$ |
80.1
|
$ |
632.6
|
$ |
-
|
$ |
7,503.3
|
$ |
-
|
$ | (76.3 | ) | ||||||||||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
1,559.5
|
-
|
-
|
|||||||||||||||||||||
|
Cash
dividends declared ($.2225 per share)
|
-
|
-
|
-
|
-
|
(226.5 | ) |
-
|
-
|
||||||||||||||||||||
|
Treasury
stock purchases
|
(18,135,900 | ) |
-
|
-
|
-
|
-
|
-
|
(781.8 | ) | |||||||||||||||||||
|
Employee
stock purchase and option plans
|
8,355,210
|
-
|
(67.6 | ) |
-
|
-
|
-
|
343.2
|
||||||||||||||||||||
|
Employee
stock loan receivable
|
-
|
-
|
-
|
(76.8 | ) |
-
|
-
|
-
|
||||||||||||||||||||
|
Balance,
August 31, 2005
|
1,013,512,047
|
80.1
|
565.0
|
(76.8 | ) |
8,836.3
|
-
|
(514.9 | ) | |||||||||||||||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
1,750.6
|
-
|
-
|
|||||||||||||||||||||
|
Cash
dividends declared ($.2725 per share)
|
-
|
-
|
-
|
-
|
(275.2 | ) |
-
|
-
|
||||||||||||||||||||
|
Treasury
stock purchases
|
(15,033,000 | ) |
-
|
-
|
-
|
-
|
-
|
(668.8 | ) | |||||||||||||||||||
|
Employee
stock purchase and option plans
|
9,383,072
|
-
|
(159.1 | ) |
| |||||||||||||||||||||||