EXHIBIT 13
ELEVEN-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
Walgreen Co. and Subsidiaries
(Dollars in Thousands, except per share data)
FISCAL YEAR 1995 1994 1993 1992
NET SALES $10,395,096 $9,234,978 $8,294,840 $7,474,961
COSTS AND DEDUCTIONS
Cost of sales 7,482,344 6,614,445 5,959,002 5,377,738
Selling, occupancy and
administration 2,392,731 2,164,889 1,929,630 1,738,770
Other (income) expense (1) (3,720) (2,777) 6,532 5,448
Total Costs and Deductions 9,871,355 8,776,557 7,895,164 7,121,956
EARNINGS
Earnings before income tax
provision and cumulative
effect of accounting changes 523,741 458,421 399,676 353,005
Income tax provision 202,950 176,492 154,387 132,377
Earnings before cumulative
effect of accounting
changes 320,791 281,929 245,289 220,628
Cumulative effect of accounting
changes (2) - - (23,623) -
Net Earnings $ 320,791 $ 281,929 $ 221,666 $ 220,628
================================================================================
PER COMMON SHARE (3)
Earnings before cumulative
effect of accounting
changes $ 1.30 $ 1.14 $ .99 $ .89
Net Earnings (2) 1.30 1.14 .90 .89
Dividends Declared .39 .34 .30 .26
Book Value 7.28 6.39 5.60 5.01
================================================================================
NON-CURRENT LIABILITIES
Long-term debt $ 2,395 $ 1,790 $ 6,210 $ 18,749
Deferred income taxes 142,278 137,741 144,186 171,820
Other non-current liabilities 237,586 213,796 176,218 103,820
================================================================================
ASSETS AND EQUITY
Total Assets $3,252,607 $2,872,841 $2,506,034 $2,346,942
================================================================================
Shareholders' Equity $1,792,586 $1,573,640 $1,378,751 $1,233,310
================================================================================
Return on Average Shareholders'
Equity (2) 19.1% 19.1% 17.0% 19.1%
================================================================================
________________________________________________________________________________
<FN>
(1) Fiscal 1993 includes the $6,821,000 costs from the early redemption of the
company's $100 million 9 1/2% sinking fund debentures, due 2016. Fiscal
1991 includes a $4,118,000 loss from the closing of the company's Memphis,
Tennessee, distribution center. Fiscal 1989 includes a $6,114,000 loss on
sale of manufacturing operations.
(2) In 1993, the company adopted two Statements of Financial Accounting
Standards, No. 106 "Employers' Accounting for Postretirement Benefits Other
Than Pensions" and No. 109 "Accounting for Income Taxes."
(3) Per share data have been adjusted for two-for-one stock splits in 1995 and
1991.
1991 1990 1989 1988 1987 1986 1985
$6,733,044 $6,047,494 $5,380,133 $4,883,520 $4,281,606 $3,660,553 $3,161,935
4,829,186 4,356,392 3,848,546 3,468,973 3,000,988 2,550,072 2,192,367
1,582,725 1,406,922 1,278,116 1,190,295 1,069,859 914,003 791,697
9,189 3,257 9,632 15,282 16,576 8,852 4,171
6,421,100 5,766,571 5,136,294 4,674,550 4,087,423 3,472,927 2,988,235
311,944 280,923 243,839 208,970 194,183 187,626 173,700
116,979 106,346 89,597 79,908 90,646 84,489 79,531
194,965 174,577 154,242 129,062 103,537 103,137 94,169
- - - - - - -
$ 194,965 $ 174,577 $ 154,242 $ 129,062 $ 103,537 $ 103,137 $ 94,169
=============================================================================
$ .79 $ .71 $ .63 $ .52 $ .42 $ .42 $ .38
.79 .71 .63 .52 .42 .42 .38
.23 .20 .17 .15 .14 .13 .11
4.39 3.85 3.35 2.90 2.53 2.25 1.96
=============================================================================
$ 122,960 $ 146,740 $ 150,121 $ 172,111 $ 141,433 $ 136,158 $ 44,336
155,314 138,926 118,320 105,548 97,399 84,604 66,300
85,064 77,075 68,624 55,314 50,840 45,592 44,130
=============================================================================
$2,074,359 $1,896,146 $1,666,322 $1,501,482 $1,354,217 $1,189,965 $ 955,691
=============================================================================
$1,081,157 $ 947,249 $ 823,401 $ 712,644 $ 622,328 $ 553,611 $ 480,974
=============================================================================
19.2% 19.7% 20.1% 19.3% 17.6% 19.9% 21.0%
=============================================================================
_____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fiscal 1995 was the twenty-first consecutive year of record sales and
earnings. Net earnings were $321 million or $1.30 per share, an increase of
13.8% from last year's earnings of $282 million or $1.14 per share. Earnings
increases resulted from higher sales and improved expense ratios.
Sales rose 12.6% to $10.4 billion in fiscal 1995 compared to increases of
11.3% in 1994 and 11.0% in 1993. Drugstore sales increases resulted from sales
gains in existing stores and added sales from new stores, each of which include
an indeterminate amount of market-driven price changes. Sales in comparable
stores (those open at least one year) were up 7.2% in 1995, 5.5% in 1994 and
6.3% in 1993. New stores accounted for 7.6% of the sales gains in 1995, 7.4% in
1994 and 6.2% in 1993. The company operated 2,085 drugstores as of August 31,
1995, compared to 1,968 a year earlier.
In spite of continuing low rates of inflation on pharmaceuticals the last
three years, pharmacy sales increased 19.8% in 1995, 18.9% in 1994 and 15.7% in
1993, with comparable stores up 13.8%, 12.1%, and 11.3% in 1995, 1994 and 1993,
respectively. Prescription sales were 43.4% of total sales for fiscal 1995
compared to 40.8% in 1994 and 38.2% in 1993. Pharmacy sales trends are expected
to continue primarily because of expansion into new markets, increased
penetration in existing markets and demographic changes such as the aging
population.
Gross margins as a percent of sales decreased to 28.0% of sales from 28.4%
last year and 28.2% in fiscal 1993. Prescription margins continue to decrease
as third party sales become a larger portion of pharmacy sales. However, the
rate of decrease is slowing as a result of emphasizing minimum profitability
standards to third party payers.
The company uses the last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were 1.29% in 1995, .3% in 1994
and 2.1% in 1993, which resulted in charges to cost of sales of $21.4 million in
1995, $5.1 million in 1994 and $28.1 million in 1993. Inflation on prescription
inventory was 2.8% in both fiscal 1995 and 1994, and 4.4% in 1993. Excluding
prescriptions, the remaining inventory experienced slight deflation during
fiscal 1995 and 1994.
Selling, occupancy and administration expenses were 23.0% of sales in fiscal
1995, 23.4% of sales in fiscal 1994 and 23.3% of sales in fiscal 1993. The
fiscal 1995 decrease, as a percent to sales, was caused by store salaries,
insurance costs and advertising. The fiscal 1994 increase was caused by higher
store salaries, insurance costs and costs associated with closing retail
locations.
Interest income decreases in both 1995 and 1994 resulted principally from
lower investment levels. Average net investment levels were approximately $59
million in 1995, $105 million in 1994, and $138 million in 1993. The lower
investment level in fiscal 1995 was substantially offset by higher interest
rates. In fiscal 1993 the company retired $100 million 9 1/2% sinking fund
debentures at a cost of $6.8 million ($.02 per share). This reduced interest
expense by $6.7 million in 1993 and $9.5 million per year thereafter.
The fiscal 1995 effective tax rate was 38.75% compared to 38.5% in 1994 and
38.6% in 1993. The increase in rate in fiscal 1995 compared to 1994 was due to
higher state income taxes and estimated interest on tax audits.
FINANCIAL CONDITION
Cash and cash equivalents and marketable securities were $22 million at
August 31, 1995, compared to $108 million at August 31, 1994. Short-term
investment objectives are to maximize yields while minimizing risk and
maintaining liquidity. To attain these objectives, investment limits are placed
on the amount, type and issuer of securities.
Net cash provided by operating activities decreased $11 million compared to
the same period a year ago. This decrease resulted primarily from increased
inventories to support store growth, offset by higher earnings. The company's
ongoing profitability is expected to continue supporting expansion and
remodeling programs, dividends to shareholders and the funding for various
technological improvements.
Net cash used for investing activities was $299 million for fiscal 1995
versus $284 million last year. Additions to property and equipment were $310
million compared to $290 million last year. Additions for this fiscal year
included expenditures for the new Woodland, California, distribution center.
During the year, a record 206 new or relocated drugstores were opened. This
compares to 196 new or relocated drugstores opened in the same period last year.
New stores are purchased or leased. Openings for this fiscal year included 17
purchased locations versus 31 for the same period last year. Planned capital
expenditures for fiscal 1996 are expected to exceed $300 million.
The company expects to open 215 new stores in fiscal 1996 and continue to
open 200 or more stores annually for the next five years. Plans during fiscal
1996 include opening 10 to 15 stores each in the new Dallas/Fort Worth and Las
Vegas markets, as well as four to five in Portland, Oregon. With the movement
to freestanding store locations (from strip centers and malls), the decision has
been made to purchase, rather than lease, more store locations than in the past.
This will eventually result in lower store occupancy costs and provide the
foundation to capitalize on the strength of the real estate selection process.
Borrowings may be necessary to finance these future obligations. By the end of
fiscal 1996 more than 400 stores are expected to offer one-hour photofinishing.
Store implementation of Intercom Plus, an advanced pharmacy computer and
workflow system, is expected to be completed in fiscal 1997. Healthcare Plus,
the company's managed care subsidiary, has formed its own PBM (pharmacy benefits
manager) network and will begin serving new plans in January.
Net cash used for financing activities was $102 million for fiscal 1995
compared to $86 million in fiscal 1994. At August 31, 1995, the company had
$123 million in unused bank lines of credit and $100 million of unissued
authorized debt securities, previously filed with the Securities and Exchange
Commission. In addition, the company has the ability to borrow an additional
$93 million against corporate-owned life insurance policies.
Earlier this fiscal year, the company received an unfavorable Tax Court
ruling concerning the depreciable lives of certain assets. The company
appealed, and on October 17, 1995, the United States Court of Appeals rendered
an opinion which reversed the ruling. The case, which involves approximately
$50 million of tax deductions taken in prior years, was remanded back to the Tax
Court for further findings on the facts. As of August 31, 1995, the company has
adequately provided for all the tax and related interest.
Adoption of Financial Accounting Board Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets" is required by fiscal 1997. This pronouncement
requires long-lived assets to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. When adopted, it is not expected to significantly impact the
company's consolidated financial position or results of operations.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1995, 1994 and 1993
(Dollars in Thousands, except per share data)
________________________________________________________________________________
EARNINGS 1995 1994 1993
NET SALES $10,395,096 $9,234,978 $8,294,840
COSTS AND DEDUCTIONS
Cost of sales 7,482,344 6,614,445 5,959,002
Selling, occupancy and administration 2,392,731 2,164,889 1,929,630
9,875,075 8,779,334 7,888,632
OTHER (INCOME) EXPENSE
Interest income (4,910) (5,363) (6,743)
Interest expense 1,190 2,586 6,454
Debt redemption costs - - 6,821
(3,720) (2,777) 6,532
EARNINGS
Earnings before income tax provision
and cumulative effect of accounting
changes 523,741 458,421 399,676
Income tax provision 202,950 176,492 154,387
Earnings before cumulative effect of
accounting changes 320,791 281,929 245,289
Cumulative effect of accounting changes - - (23,623)
Net earnings $ 320,791 $ 281,929 $ 221,666
===============================================================================
_______________________________________________________________________________
NET EARNINGS PER
COMMON SHARE
Earnings before cumulative effect of
accounting changes $ 1.30 $ 1.14 $ .99
Cumulative effect of accounting changes - - (.09)
Net earnings $ 1.30 $ 1.14 $ .90
===============================================================================
_______________________________________________________________________________
RETAINED EARNINGS 1995 1994 1993
Balance, beginning of year $1,496,721 $1,301,832 $1,156,391
Net earnings 320,791 281,929 221,666
Cash dividends declared:
$.39 per share in 1995,
$.34 in 1994 and $.30 in 1993 (95,995) (83,688) (73,843)
Employee stock purchase and
option plans (5,850) (3,352) (2,382)
Balance, end of year $1,715,667 $1,496,721 $1,301,832
================================================================================
________________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the
Notes to Consolidated Financial Statements are integral parts of
these statements.
CONSOLIDATED BALANCE SHEETS
Walgreen Co. and Subsidiaries
At August 31, 1995 and 1994
(Dollars in Thousands)
________________________________________________________________________________
ASSETS 1995 1994
CURRENT ASSETS
Cash and cash equivalents $ 22,245 $ 77,915
Marketable securities at cost, which approximates market - 30,510
Accounts receivable, net of allowances for doubtful
accounts of $24,633 in 1995 and $21,601 in 1994 246,086 193,930
Inventories 1,453,881 1,263,400
Other current assets 90,705 71,148
Total Current Assets 1,812,917 1,636,903
NON-CURRENT ASSETS
Property and equipment, at cost, less accumulated
depreciation and amortization 1,248,962 1,085,487
Other non-current assets 190,728 150,451
TOTAL ASSETS $3,252,607 $2,872,841
================================================================================
________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' EQUITY____________________________________________
CURRENT LIABILITIES
Trade accounts payable $ 606,263 $ 532,816
Accrued expenses and other liabilities 448,219 390,683
Income taxes 23,280 22,375
Total Current Liabilities 1,077,762 945,874
NON-CURRENT LIABILITIES
Deferred income taxes 142,278 137,741
Other non-current liabilities 239,981 215,586
Total Non-Current Liabilities 382,259 353,327
SHAREHOLDERS' EQUITY
Preferred stock, $.25 par value; authorized
8,000,000 shares; none issued - -
Common stock, $.3125 par value; authorized 800,000,000
shares; issued and outstanding 246,141,072 in 1995
and 1994, at stated value 76,919 76,919
Retained earnings 1,715,667 1,496,721
Total Shareholders' Equity 1,792,586 1,573,640
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,252,607 $2,872,841
================================================================================
________________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1995, 1994 and 1993
(Dollars in Thousands)
_______________________________________________________________________________
FISCAL YEAR 1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 320,791 $ 281,929 $ 221,666
Adjustments to reconcile net earnings to net
cash provided by operating activities -
Depreciation and amortization 131,537 118,118 104,660
Cumulative effect of accounting
changes - - 23,623
Deferred income taxes (7,213) 5,653 (12,645)
Other 3,388 15,983 3,631
Changes in operating assets and
liabilities -
Inventories (190,481) (169,365) (99,867)
Trade accounts payable 73,447 105,631 15,502
Accrued expenses and other
liabilities 41,669 35,051 54,230
Accounts receivable, net (36,265) (50,692) (7,427)
Insurance reserves 14,982 16,797 10,056
Other current assets (7,807) (3,910) (7,814)
Income taxes 905 693 184
Net cash provided by operating activities 344,953 355,888 305,799
CASH (USED FOR) PROVIDED BY
INVESTING ACTIVITIES
Additions to property and equipment (310,254) (289,976) (184,674)
Net investment in corporate-owned life
insurance (34,140) (6,445) (35,981)
Net sales (purchases) of marketable
securities 30,510 (815) 51,349
Proceeds from disposition of property
and equipment 15,242 13,704 8,973
Net cash used for investing activities (298,642) (283,532) (160,333)
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
Cash dividends paid (92,918) (81,226) (71,382)
Payments of long-term obligations (7,129) (5,760) (112,053)
Cost of employee stock purchase and
option plans (5,850) (3,352) (2,382)
Proceeds from (purchases for) employee
stock plans 3,916 4,300 (12,592)
Net cash used for financing activities (101,981) (86,038) (198,409)
CHANGES IN CASH AND CASH EQUIVALENTS
Net decrease in cash and
cash equivalents (55,670) (13,682) (52,943)
Cash and cash equivalents at
beginning of year 77,915 91,597 144,540
Cash and cash equivalents at
end of year $ 22,245 $ 77,915 $ 91,597
===============================================================================
_______________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
STATEMENT OF MAJOR ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated statements include the accounts of the company and its
subsidiaries. All significant intercompany transactions have been eliminated.
Certain amounts in the 1994 and 1993 Consolidated Financial Statements have been
reclassified to be consistent with the 1995 presentation.
ACCOUNTING CHANGES
In fiscal 1993 the company adopted two Statements of Financial Accounting
Standards, SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" and SFAS No. 109, "Accounting for Income Taxes."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and all highly liquid investments
with an original maturity of three months or less. All other temporary
investments are classified as marketable securities.
The company's cash management policy provides for the bank disbursement
accounts to be reimbursed on a daily basis. Checks issued but not presented to
the banks for payment of $130,000,000 and $88,000,000 at August 31, 1995 and
1994, respectively, are included in cash and cash equivalents as reductions of
other cash balances.
FINANCIAL INSTRUMENTS
The company had approximately $18,000,000 and $20,000,000 of outstanding letters
of credit at August 31, 1995 and 1994, respectively, which guaranteed foreign
trade purchases. Additional outstanding letters of credit of $57,000,000 at
August 31, 1995 and $49,000,000 at August 31, 1994 were related to insurance
activities. The company also has purchase commitments of approximately
$17,000,000 related to the purchase of store locations. There were no
investments in derivative financial instruments during fiscal 1995 and 1994.
INVENTORIES
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market
basis. At August 31, 1995 and 1994, inventories would have been greater by
$415,015,000 and $393,568,000, respectively, if they had been valued on a lower
of first-in, first-out (FIFO) cost or market basis. Cost of sales is primarily
computed on an estimated basis and adjusted based on periodic inventories.
PROPERTY AND EQUIPMENT
Depreciation is provided on a straight-line basis over the estimated useful
lives of owned assets. Leasehold improvements and leased properties under
capital leases are amortized over the estimated physical life of the property or
over the term of the lease, whichever is shorter. Major repairs which extend
the useful life of an asset are capitalized in the property and equipment
accounts. Routine maintenance and repairs are charged against earnings. The
composite method of depreciation is used for equipment; therefore, gains and
losses on retirement or other disposition of such assets are included in
earnings only when an operating location is closed or completely remodeled.
Fully depreciated property and equipment are removed from the cost and related
accumulated depreciation and amortization accounts.
Property and equipment consists of (In Thousands):_____________________________
1995 1994
Land and land improvements $ 88,097 $ 78,118
Buildings and building improvements 555,645 498,673
Equipment 1,047,548 909,187
Capitalized systems development costs 117,545 87,885
Capital lease properties 21,930 23,378
1,830,765 1,597,241
Less: accumulated depreciation and amortization 581,803 511,754
$1,248,962 $1,085,487
===============================================================================
The company capitalizes significant systems development costs. These costs are
amortized over a five-year period as phases of these systems are implemented.
Unamortized costs as of August 31, 1995 and 1994, were $84,910,000 and
$66,303,000, respectively. Amortization of these costs were $11,053,000,
$8,901,000 and $5,712,000 in 1995, 1994 and 1993, respectively.
INCOME TAXES
The company provides for federal and state income taxes on items included in the
Consolidated Statements of Earnings regardless of the period when such taxes are
payable. Deferred taxes are recognized for temporary differences between
financial and income tax reporting based on enacted tax laws and rates.
RETIREMENT BENEFITS
The principal retirement plan for employees is the Walgreen Profit-Sharing
Retirement Trust, to which both the company and the employees contribute. The
company's contribution, which is determined annually at the discretion of the
Board of Directors, has historically related to pretax income. The
profit-sharing provision was $44,315,000 in 1995, $37,683,000 in 1994 and
$35,119,000 in 1993.
The company provides certain health and life insurance benefits for retired
employees who meet eligibility requirements, including age and years of service.
The costs of these benefits are accrued over the period earned. The company's
postretirement benefit plans currently are not funded.
The company has deferred compensation plans which permit directors and
certain management employees the right to defer a portion of their compensation.
The participants earn interest on deferred amounts depending on various factors
defined in the plans. Although not linked to the plans, the company has
purchased life insurance on the participants and other key employees to fund the
distributions under these and other benefit plans.
NET EARNINGS PER COMMON SHARE
Primary net earnings per share were computed using weighted average number of
shares and common share equivalents outstanding of 247,527,030 in 1995,
247,292,458 in 1994 and 247,539,548 in 1993. Fully diluted net earnings per
share are the same as primary net earnings per share.
PRE-OPENING EXPENSES
Non-capital expenditures incurred prior to the opening of a new or remodeled
store are charged against earnings when they are incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred, and were $85,907,000 in 1995,
$93,467,000 in 1994 and $88,102,000 in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST EXPENSE
The company capitalized $751,000, $482,000 and $394,000 of interest expense as
part of significant construction projects during fiscal 1995, 1994 and 1993,
respectively. Interest paid, net of amounts capitalized, was $2,950,000 in
1995, $1,954,000 in 1994 and $9,950,000 in 1993. In fiscal 1993 the company
retired $100 million 9 1/2% sinking fund debentures, due 2016.
LEASES
The company generally operates in leased premises. Original non-cancelable
lease terms typically are 20 years and may contain escalation clauses, along
with options that permit renewals for additional periods. The total amount of
the minimum rent is expensed on a straight-line basis over the term of the
lease. In addition to minimum fixed rentals, most leases provide for contingent
rentals based upon sales.
Minimum rental commitments at August 31, 1995, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Thousands):_________________________________________________________________
YEAR____________________________________________________________________________
1996 $ 278,529
1997 290,201
1998 281,830
1999 274,145
2000 264,728
Later 2,628,922
Total minimum lease payments $4,018,355
================================================================================
The above minimum lease payments include minimum rental commitments related to
capital leases amounting to $15,799,000 at August 31, 1995. The present value
of net minimum capital lease payments, due after 1996, are reflected in the
accompanying Consolidated Balance Sheets as part of other non-current
liabilities. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately $13,020,000 on leases due in the future under
non-cancelable subleases.
Rental expense was as follows (In Thousands):
1995 1994 1993
Minimum rentals $279,217 $242,637 $214,537
Contingent rentals 34,707 34,107 35,052
Less: Sublease rental income (2,845) (2,707) (3,246)
$311,079 $274,037 $246,343
================================================================================
INCOME TAXES
The provision for income taxes consists of the following (In Thousands):
1995 1994 1993
Current provision -
Federal $177,023 $145,381 $133,562
State 33,140 25,458 33,470
210,163 170,839 167,032
Deferred provision -
Federal (6,025) 3,881 (3,903)
State (1,188) 1,772 (8,742)
(7,213) 5,653 (12,645)
$202,950 $176,492 $154,387
================================================================================
The components of the deferred provision were (In Thousands):
1995 1994 1993
Accelerated depreciation $ 10,191 $ 20,756 $ 17,192
Employee benefit plans (9,154) (6,956) (6,518)
Insurance (5,451) (2,763) (14,061)
Other (2,799) (5,384) (9,258)
$ (7,213) $ 5,653 $(12,645)
================================================================================
The deferred tax assets and liabilities included in the Consolidated Balance
Sheet as of August 31, 1995, consist of the following (In Thousands):
ASSETS LIABILITIES TOTAL
Current -
Insurance $ 13,641 $ - $ 13,641
Employee benefit plans 31,723 (11,115) 20,608
Allowances for doubtful accounts 9,987 - 9,987
Inventory 11,060 (28,131) (17,071)
Other 16,434 (3,055) 13,379
82,845 (42,301) 40,544
Non-current -
Accelerated depreciation - (240,772) (240,772)
Insurance 27,695 - 27,695
Employee benefit plans 40,826 - 40,826
Other 30,184 (211) 29,973
98,705 (240,983) (142,278)
$181,550 $(283,284) $(101,734)
================================================================================
Income taxes paid were $209,258,000, $170,146,000 and $166,848,000 during the
fiscal years ended August 31, 1995, 1994 and 1993, respectively. The difference
between the statutory income tax rate and the effective tax rate is principally
due to state income tax provisions.
SHORT-TERM BORROWINGS
At August 31, 1995, the company had approximately $123,000,000 of available bank
lines of credit. The credit lines are renewable annually at various dates and
provide for loans of varying maturities at the prime rate. There are no
compensating balance arrangements.
The company obtained funds through the placement of commercial paper, as
follows (Dollars in Thousands):
1995 1994 1993
Average outstanding during the year $ 5,996 $ 2,011 $ -
Largest month-end balance 35,000 12,977 -
(Nov) (Nov) -
Weighted average interest rate 5.5% 3.3% -
================================================================================
CONTINGENCIES
The company is involved in various legal proceedings incidental to the normal
course of business. This includes a patent infringement suit against the
company and its co-defendant supplier. On October 20, 1994, a judgment of $11.3
million plus interest was entered on this suit. The plaintiff subsequently
filed a motion for treble damages, which was denied. That denial has been
appealed. The case has also been appealed by the defendants, and the company
has an indemnification agreement from its supplier for the amount of the
judgment plus interest. Management is of the opinion, with which its General
Counsel concurs, that the patent infringement suit and other legal proceedings
will not have a material adverse effect on the company's consolidated financial
position or results of operations.
CAPITAL STOCK
All share data have been adjusted to reflect a two-for-one stock split
distributed to shareholders August 8, 1995. In addition the Board of Directors
approved increases in the authorized common stock, from 400 million shares to
800 million shares, and in the authorized preferred stock, from 4 million shares
to 8 million shares.
The company's common stock is subject to a Rights Agreement under which
each share has attached to it a Right to purchase one-four hundredth of a share
of a new series of Preferred Stock, at a price of $30.00 per Right, in the event
a person or group acquires or attempts to acquire 20% of the then outstanding
shares of the company. In the event that a person or group acquires 20% or more
of the outstanding common stock of the company (other than in certain instances
as defined in the Rights Agreement), each Right, except those of an Acquiring
Person, would entitle the holder to purchase a number of shares of the company's
common stock which number is determined pursuant to a formula contained in the
Rights Agreement. The Rights, which are non-voting, will expire on August 21,
1996, but may be redeemed by the company at a price of $.0125 per Right at any
time prior to a public announcement that 20% or more of the company's common
stock has been acquired.
As of August 31, 1995, 27,168,328 shares of common stock were reserved for
future stock issuances under the company's employee stock purchase, option and
award plans. Preferred stock of 2,462,120 shares have been reserved for
issuance upon the exercise of Preferred Share Purchase Rights.
STOCK OPTION PLANS
The Walgreen Co. Executive Stock Option Plan provides for the granting to key
employees of options to purchase company common stock over a 10-year period, at
a price not less than the fair market value on the date of grant. Options may
be issued under the Plan until October 13, 2002, for an aggregate of 9,600,000
shares of common stock of the company. The number of shares available for
future grant was 1,913,090 and 3,952,750 at August 31, 1995 and 1994,
respectively. Options granted prior to July 13, 1988, must be exercised in
sequential order. After this date, options may be exercised in any order
provided they are not restricted by any holding period.
The Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) provides for
the granting of options to eligible employees upon the purchase of company
shares subject to certain restrictions. Under the terms of the plan, the option
price cannot be less than 85% of the fair market value at the date of the grant.
Compensation expense related to the plan was $314,000 and $986,000 in 1995 and
1994, respectively. Options may be issued under this plan until September 30,
2002, for an aggregate of 10,000,000 shares of common stock of the company. The
number of shares available for future grant was 7,723,712 and 7,756,126 at
August 31, 1995 and 1994, respectively. The options granted during 1995 and
1994 have a two-year holding period.
Stock option transactions in fiscal 1993, 1994 and 1995 are summarized as
follows:
Per Share
Shares Option Price Exercisable
Outstanding August 31, 1992 2,965,552 $ 2.703-$19.000 2,165,806
Granted 2,816,696 19.188- 20.188
Exercised (231,976) 2.703- 13.844
Cancelled (50,028) 4.875- 19.250
Outstanding August 31, 1993 5,500,244 $ 4.203-$20.188 1,930,772
Granted 449,520 18.688- 20.875
Exercised (223,696) 4.203- 19.250
Cancelled and expired (70,538) 7.219- 19.750
Outstanding August 31, 1994 5,655,530 $ 6.172-$20.875 2,018,828
Granted 2,114,590 18.813- 23.750
Exercised (231,794) 6.172- 19.250
Cancelled and expired (60,516) 11.406- 19.750
Outstanding August 31, 1995 7,477,810 $ 6.563-$23.750 4,686,171
==============================================================================
POSTRETIREMENT BENEFITS
The components of postretirement benefit cost for fiscal 1995, 1994 and 1993
were as follows (In Thousands):
1995 1994 1993
Service costs - benefits earned during the year $3,781 $2,859 $2,413
Interest cost on accumulated postretirement
benefit obligation 5,576 4,638 4,048
Amortization of unrecognized actuarial amount 229 271 -
Total postretirement benefit cost $9,586 $7,768 $6,461
====== ====== ======
The company's unfunded accumulated postretirement benefit liability at August
31, included in the Consolidated Balance Sheets were as follows (In Thousands):
1995 1994
Retirees $20,210 $18,228
Fully eligible active plan participants 9,834 11,244
Other active plan participants 45,747 41,390
Accumulated postretirement benefit obligation 75,791 70,862
Unrecognized actuarial amount (1,820) (4,469)
Accrued postretirement benefit liability $73,971 $66,393
======= =======
The accumulated postretirement benefit obligation was determined assuming the
discount rate was 7.75% and the healthcare cost trend rate was 7.0% for 1995;
with a gradual decline over a 14-year period to 4.5%. These trend rates reflect
the company's prior experience and management's expectation that future rates
will decline. The effect of a 1% increase each year in the projected healthcare
cost trend rate would increase the accumulated postretirement benefit obligation
at August 31, 1995 by $13,731,000 and the service and interest cost components
of the fiscal 1995 net periodic postretirement benefit cost by $1,991,000. The
unrecognized actuarial amount is being amortized over the average remaining
service period of active plan participants.
SUPPLEMENTARY FINANCIAL INFORMATION
Included in the Consolidated Balance Sheets captions are the following assets
and liabilities (In Thousands):
1995 1994
Other non-current assets -
Cash surrender value of life insurance $166,719 $122,172
Other 24,009 28,279
$190,728 $150,451
==============================================================================
Accrued expenses and other liabilities -
Accrued salaries $139,438 $122,213
Taxes other than income taxes 63,169 59,071
Profit sharing 60,094 49,904
Other 185,518 159,495
$448,219 $390,683
==============================================================================
Other non-current liabilities -
Insurance $ 73,733 $ 63,628
Postretirement benefit obligation 71,370 63,603
Accrued rent 50,482 41,187
Deferred compensation 23,667 24,223
Deferred income 10,401 12,020
Obligations under capital leases 7,933 9,135
Long-term debt, net of current maturities 2,395 1,790
$239,981 $215,586
==============================================================================
Long-term debt includes notes and other real estate obligations with interest
rates at 6.25% and prime. Annual maturities due on long-term debt are
$671,000, $394,000, $422,000, $445,000 and $44,000 for fiscal 1996 through 2000,
respectively.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Walgreen Co.:
We have audited the accompanying consolidated balance sheets of Walgreen
Co. (an Illinois corporation) and Subsidiaries as of August 31, 1995 and
1994, and the related consolidated statements of earnings, retained
earnings and cash flows for each of the three years in the period ended
August 31, 1995. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Walgreen Co.
and Subsidiaries as of August 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 1995 in conformity with generally accepted accounting
principles.
As indicated in the Statement of Major Accounting Policies, under
"Accounting Changes", effective September 1, 1992, the company changed its
method of accounting for postretirement benefits other than pensions and
income taxes.
Arthur Andersen LLP
Chicago, Illinois,
September 29, 1995
MANAGEMENT'S REPORT
The primary responsibility for the integrity and objectivity of the consolidated
financial statements and related financial data rests with the management of
Walgreen Co. The financial statements were prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and
included amounts that were based on management's most prudent judgments and
estimates relating to matters not concluded by fiscal year-end. Management
believes that all material uncertainties have been either appropriately
accounted for or disclosed. All other financial information included in this
annual report is consistent with the financial statements.
The firm of Arthur Andersen LLP, independent public accountants, was
engaged to render a professional opinion on Walgreen Co.'s consolidated
financial statements. Their report contains an opinion based on their audit,
which was made in accordance with generally accepted auditing standards and
procedures, which they believed were sufficient to provide reasonable assurance
that the consolidated financial statements, considered in their entirety, are
not misleading and do not contain material errors.
Three outside members of the Board of Directors comprise the company's
Audit Committee, which meets at least quarterly and is responsible for reviewing
and monitoring the company's financial and accounting practices. In order to
insure and maintain complete independence, Arthur Andersen LLP and the company's
General Auditor have access to meet alone with the Audit Committee, which also
meets with the company's management to discuss financial matters, auditing and
internal accounting controls.
The company's systems are designed to provide an effective system of
internal accounting controls to obtain reasonable assurance at reasonable cost
that assets are safeguarded from material loss or unauthorized use and
transactions are executed in accordance with management's authorization and
properly recorded. To this end, management maintains an internal control
environment which is shaped by established operating policies and procedures, an
appropriate division of responsibility at all organizational levels, and a
corporate ethics policy which is monitored annually. The company also has an
Internal Control Evaluation Committee, comprised primarily of senior management
from the Accounting and Auditing Departments, which oversees the evaluation of
internal controls on a company-wide basis. Management believes it has
appropriately responded to the internal auditors' and independent public
accountants' recommendations concerning the company's internal control system.
__C. R. Walgreen III__ __R. H. Clausen__
C. R. Walgreen III R. H. Clausen
Chairman of the Board Controller
and Chief Executive Officer and Chief Accounting Officer
__R. L. Polark__
R. L. Polark
Senior Vice President
and Chief Financial Officer
THE WALGREEN YEAR...A REVIEW BY QUARTERS (UNAUDITED)
Summary of Quarterly Results, Fiscal 1995 and 1994
(Dollars in Thousands, except per share data)
Quarter Ended
Fiscal
November February May August Year
________________________________________________________________________________
Fiscal 1995
Net sales $2,405,556 $2,806,984 $2,617,368 $2,565,188 $10,395,096
Gross profit 664,792 797,861 729,122 720,977 2,912,752
Net earnings 53,994 111,557 78,990 76,250 320,791
Net earnings per
common share $ .22 $ .45 $ .32 $ .31 $ 1.30
________________________________________________________________________________
Fiscal 1994
Net sales $2,117,954 $2,498,537 $2,335,961 $2,282,526 $9,234,978
Gross profit 589,802 712,958 656,037 661,736 2,620,533
Net earnings 44,213 97,615 71,018 69,083 281,929
Net earnings per
common share $ .18 $ .39 $ .29 $ .28 $ 1.14
================================================================================
________________________________________________________________________________
COMMENTS ON QUARTERLY RESULTS
In further explanation of and supplemental to the quarterly results, the 1995
fourth quarter LIFO adjustment was a credit of $3,350,000 compared to a 1994
credit of $14,335,000. If the 1995 interim results were adjusted to reflect the
actual inventory inflation rates and inventory levels at August 31, 1995,
earnings per share would have been higher in each of the first two quarters by
$.01, and lower in the fourth quarter by $.02. Similar adjustments in 1994
would have increased earnings per share in each of the first two quarters by
$.02 and decreased the fourth quarter by $.04.
WALGREENS NATIONWIDE
State 1995 1994 State 1995 1994
Arizona 120 110 Missouri 68 65
Arkansas 9 4 Nebraska 30 28
California 131 117 New Hampshire 8 9
Colorado 50 47 New Jersey 31 30
Connecticut 31 30 New Mexico 36 35
Florida 344 326 New York 26 21
Illinois 316 313 North Dakota 1 1
Indiana 102 94 Ohio 52 39
Iowa 30 30 Oklahoma 10 9
Kansas 15 14 Pennsylvania 1 0
Kentucky 35 36 Rhode Island 5 4
Louisiana 46 45 Tennessee 76 69
Massachusetts 67 67 Texas 199 189
Michigan 26 24 Washington 5 5
Minnesota 60 59 Wisconsin 110 108
Mississippi 5 3 Puerto Rico 40 37
Total 2,085 1,968
Information is provided as of fiscal year-end.