EXHIBIT 13
ELEVEN-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
Walgreen Co. and Subsidiaries
(Dollars in Millions, except per share data)
FISCAL YEAR 1997 1996 1995 1994
NET SALES $13,363 $11,778 $10,395 $ 9,235
COSTS AND DEDUCTIONS
Cost of sales 9,682 8,515 7,482 6,615
Selling, occupancy and
administration 2,973 2,659 2,393 2,165
Other (income) expense (1) (4) (3) (4) (3)
Total Costs and Deductions 12,651 11,171 9,871 8,777
EARNINGS
Earnings before income tax
provision 712 607 524 458
Income tax provision 276 235 203 176
Net Earnings $ 436 $ 372 $ 321 $ 282
================================================================================
PER COMMON SHARE (3)
Net Earnings $ .88 $ .75 $ .65 $ .57
Dividends Declared .24 .22 .20 .17
Book Value 4.81 4.15 3.64 3.20
================================================================================
NON-CURRENT LIABILITIES
Long-term debt $ 3 $ 4 $ 2 $ 2
Deferred income taxes 113 145 142 138
Other non-current liabilities 279 260 238 214
================================================================================
ASSETS AND EQUITY
Total Assets $ 4,207 $ 3,634 $ 3,253 $ 2,873
================================================================================
Shareholders' Equity $ 2,373 $ 2,043 $ 1,793 $ 1,574
================================================================================
Return on Average Shareholders'
Equity 19.8% 19.4% 19.1% 19.1%
================================================================================
________________________________________________________________________________
<FN>
(1) Fiscal 1993 includes the $7 million costs from the early redemption of the
company's $100 million 9 1/2% sinking fund debentures, due 2016. Fiscal
1991 includes a $4 million loss from the closing of the company's Memphis,
Tennessee, distribution center. Fiscal 1989 includes a $6 million loss on
sale of manufacturing operations.
(2) Fiscal 1993 results of operations exclude the $24 million ($.05 per share)
costs from the cumulative effect of accounting changes for postretirement
benefits and income taxes.
(3) Per share data have been adjusted for two-for-one stock splits in 1997, 1995
and 1991.
1993(2) 1992 1991 1990 1989 1988 1987
$8,295 $7,475 $6,733 $6,047 $5,380 $4,884 $4,282
5,959 5,378 4,829 4,356 3,849 3,469 3,001
1,930 1,739 1,583 1,407 1,278 1,190 1,070
7 5 9 3 9 16 17
7,896 7,122 6,421 5,766 5,136 4,675 4,088
399 353 312 281 244 209 194
154 132 117 106 90 80 90
$ 245 $ 221 $ 195 $ 175 $ 154 $ 129 $ 104
=============================================================================
$ .50 $ .45 $ .39 $ .35 $ .31 $ .26 $ .21
.15 .13 .12 .10 .09 .08 .07
2.80 2.51 2.20 1.92 1.67 1.45 1.26
=============================================================================
$ 6 $ 19 $ 123 $ 147 $ 150 $ 172 $ 141
144 172 155 139 118 106 97
176 104 85 77 69 55 51
=============================================================================
$2,506 $2,347 $2,074 $1,896 $1,666 $1,501 $1,354
=============================================================================
$1,379 $1,233 $1,081 $ 947 $ 823 $ 713 $ 622
=============================================================================
18.8% 19.1% 19.2% 19.7% 20.1% 19.3% 17.6%
=============================================================================
_____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fiscal 1997 was the twenty-third consecutive year of record sales and
earnings. Net earnings were $436 million or $.88 per share, an increase of
17.2% from last year's earnings of $372 million or $.75 per share. Earnings
increases resulted from higher sales and improved expense ratios.
Total net sales increased by 13.5% to $13.4 billion in fiscal 1997 compared
to increases of 13.3% in 1996 and 12.6% in 1995. Drugstore sales increases
resulted from sales gains in existing stores and added sales from new stores,
each of which include an indeterminate amount of market-driven price changes.
Comparable drugstore (those open at least one year) sales were up 8.1% in 1997,
8.5% in 1996, and 7.2% in 1995. New store openings accounted for 8.6% of the
sales gains in 1997 and 7.6% in 1996 and 1995. The company operated 2,358
drugstores as of August 31, 1997, compared to 2,193 a year earlier.
Prescription sales increased 18.1% in 1997, 18.0% in 1996, and 19.8% in
1995. Comparable drugstores were up 13.0% in 1997 and 1996, and 13.8% in 1995.
Prescription sales were 47.1% of total sales for fiscal 1997 compared to 45.2%
in 1996 and 43.4% in 1995. Pharmacy sales trends are expected to continue
primarily because of expansion into new markets, increased penetration in
existing markets and demographic changes such as the aging population.
Gross margins as a percent of sales decreased to 27.5% of sales from 27.7%
last year and 28.0% in fiscal 1995. Prescription margins continue to decrease
as third party retail and mail order sales become a larger portion of pharmacy
sales. The company is responding to gross margin pressures by emphasizing
minimum third party profitability standards. Improved gross margins in the rest
of the store helped offset the decline.
The company uses the last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were .82% in 1997, .68% in 1996,
and 1.29% in 1995, which resulted in charges to cost of sales of $16 million in
1997, $13 million in 1996, and $21 million in 1995. Inflation on prescription
inventory was 1.9% in 1997, 2.3% in 1996, and 2.8% in 1995.
Selling, occupancy and administration expenses were 22.2% of sales in fiscal
1997, 22.6% of sales in fiscal 1996, and 23.0% of sales in fiscal 1995. The
fiscal 1997 decrease, as a percent to sales, was caused principally by lower
advertising expenses. The fiscal 1996 decrease, as a percent to sales, was
caused by lower advertising expenses, insurance costs and improved accounts
receivable collection experience. The growth in mail order pharmacy, which has
a lower expense ratio, has also been contributing to the decreases.
Interest income was relatively constant over the three year periods.
Average net investment levels were approximately $79 million in 1997, $76
million in 1996, and $59 million in 1995.
The fiscal 1997, 1996 and 1995 effective tax rates were 38.75%.
FINANCIAL CONDITION
Cash and cash equivalents were $73 million at August 31, 1997, compared to
$9 million at August 31, 1996. Short-term investment objectives are to maximize
yields while minimizing risk and maintaining liquidity. To attain these
objectives, investment limits are placed on the amount, type and issuer of
securities.
Net cash provided by operating activities for fiscal 1997 was $650 million
compared to $411 million a year ago. The change between periods was principally
due to higher earnings and better inventory control which included improved
payment terms. Contributing to this improvement was the company's SIMS
inventory management system. The company's profitability is the principal
source for providing funds for expansion and remodeling programs, dividends to
shareholders and funding for various technological improvements.
Net cash used for investing activities was $486 million versus $299 million
last year. Additions to property and equipment were $485 million compared to
$364 million last year. During the year, 251 new or relocated drugstores were
opened which included four acquired locations. This compares to 210 new or
relocated drugstores opened in the same period last year. New stores are owned
or leased. There were 110 owned locations opened during the year or under
construction at August 31, 1997 versus 57 for the same period last year. The
company borrowed $19 million in fiscal 1997, compared to $82 million in fiscal
1996, from corporate-owned life insurance policies.
Capital expenditures for fiscal 1998 are expected to exceed $500 million.
The company expects to open at least 280 new stores in fiscal 1998 and 360 in
fiscal 1999. The company is continuing to relocate stores to more convenient
and profitable freestanding locations. Expectations are that 3,000 drugstores
will be operating by the year 2000. The company believes that additional
expansion across the country is still possible beyond the year 2000. This may
necessitate future long-term borrowings. Intercom Plus, an advanced pharmacy
computer and workflow system, is expected to be fully implemented in early
fiscal 1998.
Net cash used for financing activities was $100 million compared to $125
million a year ago. The company issued 1.5 million shares of authorized but
previously unissued shares to satisfy various stock option and purchase plan
requirements. This avoided purchasing shares on the open market which would
have resulted in cash outflows of approximately $40 million. At August 31,
1997, the company had $139 million in unused bank lines of credit and $100
million of unissued authorized debt securities, previously filed with the
Securities and Exchange Commission.
In September 1997, the company concluded a tax case which involved the
depreciable lives of certain assets. This resolution resulted in a fiscal 1998
first quarter payment of approximately $37 million of tax. In addition, during
the first quarter of fiscal 1998, $58 million of cash was received from the
surrender of a group of corporate-owned life insurance policies. As of August
31, 1997, the company adequately provided for the tax and related interest.
The company has been addressing computer software modifications or
replacements to enable transactions to process properly in the year 2000. All
necessary changes are expected to occur in a timely manner and the cost will not
have a significant impact on the ongoing results of operations.
In March 1997, Financial Accounting Board Statement No. 128 "Earnings Per
Share" was issued. Under this pronouncement, which must be adopted in our
fiscal 1998 second quarter, "basic earnings per share" and "diluted earnings per
share", as defined by the bulletin, will replace "primary earnings per share"
and "fully diluted earnings per share." The objective is to make the
computation more compatible with international accounting standards. The
company does not expect basic earnings per share to be materially different from
primary earnings per share.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1997, 1996 and 1995
(Dollars in Millions, except per share data)
_______________________________________________________________________________
EARNINGS 1997 1996 1995
NET SALES $13,363 $11,778 $10,395
COSTS AND DEDUCTIONS
Cost of sales 9,682 8,515 7,482
Selling, occupancy and administration 2,973 2,659 2,393
12,655 11,174 9,875
OTHER (INCOME) EXPENSE
Interest income (6) (5) (5)
Interest expense 2 2 1
(4) (3) (4)
EARNINGS
Earnings before income tax provision 712 607 524
Income tax provision 276 235 203
Net earnings $ 436 $ 372 $ 321
===============================================================================
_______________________________________________________________________________
NET EARNINGS PER
COMMON SHARE $ .88 $ .75 $ .65
===============================================================================
_______________________________________________________________________________
RETAINED EARNINGS 1997 1996 1995
Balance, beginning of year $ 1,966 $ 1,716 $ 1,497
Net earnings 436 372 321
Cash dividends declared: $.24 per share
in 1997, $.22 in 1996 and $.20 in 1995 (118) (109) (96)
Employee stock purchase and option plans (18) (13) (6)
Balance, end of year $ 2,266 $ 1,966 $ 1,716
================================================================================
________________________________________________________________________________
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, 1997 and 1996
(Dollars in Millions)
________________________________________________________________________________
ASSETS 1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 73 $ 9
Accounts receivable 376 288
Inventories 1,733 1,632
Other current assets 144 90
Total Current Assets 2,326 2,019
NON-CURRENT ASSETS
Property and equipment, at cost, less accumulated
depreciation and amortization 1,754 1,449
Other non-current assets 127 166
TOTAL ASSETS $ 4,207 $ 3,634
================================================================================
________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 813 $ 692
Accrued expenses and other liabilities 554 467
Income taxes 72 23
Total Current Liabilities 1,439 1,182
NON-CURRENT LIABILITIES
Deferred income taxes 113 145
Other non-current liabilities 282 264
Total Non-Current Liabilities 395 409
SHAREHOLDERS' EQUITY
Preferred stock, $.125 par value; authorized
16 million shares; none issued - -
Common stock, $.15625 par value; authorized 1.6 billion
shares; issued and outstanding 493,789,966 in 1997
and 492,282,144 in 1996 77 77
Paid-in capital 30 -
Retained earnings 2,266 1,966
Total Shareholders' Equity 2,373 2,043
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,207 $ 3,634
================================================================================
________________________________________________________________________________
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, 1997, 1996 and 1995
(Dollars in Millions)
_______________________________________________________________________________
FISCAL YEAR 1997 1996 1995
CASH FLOWS FORM OPERATING ACTIVITIES
Net earnings $ 436 $ 372 $ 321
Adjustments to reconcile net earnings to net
cash provided by operating activities -
Depreciation and amortization 164 147 132
Deferred income taxes 8 3 (7)
Other 8 5 3
Changes in operating assets and
liabilities -
Trade accounts payable 121 85 73
Inventories (101) (178) (191)
Accounts receivable (74) (60) (36)
Accrued expenses and other
liabilities 73 42 42
Income taxes 12 (9) 1
Other 3 4 7
Net cash provided by operating activities 650 411 345
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (485) (364) (310)
Net (investment in) borrowing against
corporate-owned life insurance (16) 47 (34)
Disposition of property and equipment 15 18 15
Net proceeds from marketable securities - - 30
Net cash used for investing activities (486) (299) (299)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (116) (105) (93)
Cost of employee stock purchase and
option plans (18) (13) (6)
Proceeds from (purchases for) employee
stock plans 35 (7) 4
Payments of long-term obligations (1) - (7)
Net cash used for financing activities (100) (125) (102)
CHANGES IN CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and
cash equivalents 64 (13) (56)
Cash and cash equivalents at
beginning of year 9 22 78
Cash and cash equivalents at
end of year $ 73 $ 9 $ 22
===============================================================================
_______________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
STATEMENT OF MAJOR ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The company is principally in the retail drugstore business. Stores are located
in 34 states and Puerto Rico. At August 31, 1997, there were 2,358 retail
drugstores and two mail service facilities. Prescription sales were 47.1% of
total sales for fiscal 1997 compared to 45.2% in 1996 and 43.4% in 1995.
BASIS OF PRESENTATION
The consolidated statements include the accounts of the company and its
subsidiaries. All significant intercompany transactions have been eliminated.
The financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's most prudent
judgments and estimates. Actual results may differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and all highly liquid investments
with an original maturity of three months or less. The company's cash
management policy provides for the bank disbursement accounts to be reimbursed
on a daily basis. Checks issued but not presented to the banks for payment of
$145 million and $143 million at August 31, 1997 and 1996, respectively, are
included in cash and cash equivalents as reductions of other cash balances.
FINANCIAL INSTRUMENTS
The company had approximately $38 million and $12 million of outstanding letters
of credit at August 31, 1997 and 1996, respectively, which guaranteed foreign
trade purchases. Additional outstanding letters of credit of $59 million at
August 31, 1997 and 1996, were related to insurance activities. The company
also had purchase commitments of approximately $209 million and $68 million at
August 31, 1997 and 1996, respectively, related to the purchase of store
locations. There were no investments in derivative financial instruments during
fiscal 1997 and 1996.
INVENTORIES
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market
basis. At August 31, 1997 and 1996, inventories would have been greater by
$444 million and $428 million, respectively, if they had been valued on a lower
of first-in, first-out (FIFO) cost or market basis. Cost of sales is primarily
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, completely remodeled or
impaired resulting in the carrying amount not being recoverable. Fully
depreciated property and equipment are removed from the cost and related
accumulated depreciation and amortization accounts.
Property and equipment consists of (In Millions):
1997 1996
Land and land improvements
Owned stores $ 217 $ 102
Distribution centers 19 18
Other locations 9 9
Buildings and building improvements
Leased stores (building improvements only) 337 321
Owned stores 261 153
Distribution centers 117 108
Other locations 41 38
Equipment
Stores 783 687
Distribution centers 162 153
Other locations 383 357
Capitalized systems development costs 154 142
Capital lease properties 19 20
2,502 2,108
Less: accumulated depreciation and amortization 748 659
$ 1,754 $ 1,449
===============================================================================
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, 1997 and 1996, were $97 million and
$98 million, respectively. Amortization of these costs were $14 million in
1997, and $11 million in both 1996 and 1995.
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 $59 million in 1997, $50 million in 1996 and
$44 million in 1995.
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 498,334,545 in 1997,
496,872,010 in 1996 and 495,054,060 in 1995. 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 $68 million in 1997,
$82 million in 1996 and $86 million in 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST EXPENSE
The company capitalized less than $1 million of interest expense as part of
significant construction projects during fiscal 1997, 1996 and 1995. Interest
paid, net of amounts capitalized, was $2 million in 1997 and $3 million in both
1996 and 1995.
LEASES
Although some locations are owned, the company generally operates in leased
premises. Original non-cancelable lease terms typically are 20 years and may
contain escalation clauses, along with options that permit renewals for
additional periods. The total amount of the minimum rent is expensed on a
straight-line basis over the term of the lease. In addition to minimum fixed
rentals, most leases provide for contingent rentals based upon sales.
Minimum rental commitments at August 31, 1997, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Millions):
YEAR
1998 $ 368
1999 387
2000 370
2001 355
2002 340
Later 3,568
Total minimum lease payments $ 5,388
================================================================================
The above minimum lease payments include minimum rental commitments related to
capital leases amounting to $11 million at August 31, 1997. The present value
of net minimum capital lease payments, due after 1998, 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 $14 million on leases due in the future under
non-cancelable subleases.
Rental expense was as follows (In Millions):
1997 1996 1995
Minimum rentals $ 357 $ 318 $ 279
Contingent rentals 35 36 35
Less: Sublease rental income (3) (3) (3)
$ 389 $ 351 $ 311
================================================================================
INCOME TAXES
The provision for income taxes consists of the following (In Millions):
1997 1996 1995
Current provision -
Federal $ 228 $ 196 $ 177
State 40 36 33
268 232 210
Deferred provision -
Federal 7 3 (6)
State 1 - (1)
8 3 (7)
$ 276 $ 235 $ 203
================================================================================
The components of the deferred provision were (In Millions):
1997 1996 1995
Employee benefit plans $ (14) $ (15) $ (9)
Accelerated depreciation 9 12 10
Inventory 22 1 4
Other (9) 5 (12)
$ 8 $ 3 $ (7)
================================================================================
The deferred tax assets and liabilities included in the Consolidated Balance
Sheets consist of the following (In Millions):
1997 1996
Deferred tax assets -
Employee benefit plans $ 95 $ 83
Insurance 41 40
Accrued rent 35 28
Inventory 15 15
Other 28 26
214 192
Deferred tax liabilities -
Accelerated depreciation 225 253
Inventory 55 33
Other 9 11
289 297
Net deferred tax liabilities $ 75 $ 105
================================================================================
Income taxes paid were $243 million, $241 million and $209 million during the
fiscal years ended August 31, 1997, 1996 and 1995, 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, 1997, the company had approximately $139 million of available bank
lines of credit. The credit lines are renewable annually at various dates and
provide for loans of varying maturities at the prime rate. There are no
compensating balance arrangements.
The company obtained funds through the placement of commercial paper, as
follows (Dollars in Millions):
1997 1996 1995
Average outstanding during the year $ 8 $ 19 $ 6
Largest month-end balance 42 77 35
(Sept) (Nov) (Nov)
Weighted average interest rate 5.4% 5.8% 5.5%
================================================================================
CONTINGENCIES
The company is involved in various legal proceedings incidental to the normal
course of business. Company management is of the opinion, based upon the advice
of General Counsel, that although the outcome of such litigation cannot be
forecast with certainty, the final disposition should not have a material
adverse effect on the company's consolidated financial position or results of
operations.
CAPITAL STOCK
All share data have been adjusted to reflect a two-for-one stock split
distributed to shareholders August 8, 1997. In addition, the Board of Directors
approved increases in the authorized common stock, from 800 million shares to
1.6 billion shares, and in the authorized preferred stock, from 8 million shares
to 16 million shares.
In fiscal 1997 there was an additional issuance of 1,507,822 shares causing
a $30 million increase in paid-in capital. There were no changes to the
company's common stock or paid-in capital balances in fiscal 1996 or 1995.
The company's common stock is subject to a Rights Agreement under which
each share has attached to it a Right to purchase one one-hundredth of a share
of a new series of Preferred Stock, at a price of $75.00 per Right, in the event
a person or group acquires or attempts to acquire 15% of the then outstanding
shares of the company. In the event that a person or group acquires 15% 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,
2006, but may be redeemed by the company at a price of $.005 per Right at any
time prior to a public announcement that 15% or more of the company's common
stock has been acquired.
As of August 31, 1997, 62,101,320 shares of common stock were reserved for
future stock issuances under the company's employee stock purchase, option and
award plans. Preferred stock of 4,937,900 shares have been reserved for
issuance upon the exercise of Preferred Share Purchase Rights.
STOCK COMPENSATION PLANS
The Walgreen Co. Executive Stock Option Plan provides for the granting to key
employees of options to purchase company common stock over a 10-year period, at
a price not less than the fair market value on the date of the grant. Under
this Plan, options may be granted until October 9, 2006, for an aggregate of
19,200,000 shares of common stock of the company. The options granted during
fiscal 1997 and 1996 have a three-year holding period.
The Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) provides for
the granting of options to purchase company common stock over a period of 10
years to eligible employees upon the purchase of company shares subject to
certain restrictions. Under the terms of the Plan, the option price cannot be
less than 85% of the fair market value at the date of grant. Compensation
expense related to the Plan was less than $1 million in fiscal 1997, 1996 and
1995. Options may be granted under this Plan until September 30, 2002, for an
aggregate of 20,000,000 shares of common stock of the company. The options
granted during fiscal 1997 and 1996 have a two-year holding period.
A summary of information relative to the company's stock option plans follows:
Options Outstanding Exercisable Options
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
August 31, 1994 11,311,060 $ 7.93
Granted 4,229,180 9.43
Exercised (463,588) 7.29
Canceled/Forfeited (121,032) 9.45 -
August 31, 1995 14,955,620 $ 8.36 9,372,342 $ 7.67
Granted 299,136 12.95
Exercised (758,300) 7.69
Canceled/Forfeited (42,848) 9.63 -
August 31, 1996 14,453,608 $ 8.49 10,741,596 $ 8.04
Granted 4,706,936 17.97
Exercised (2,233,992) 6.26
Canceled/Forfeited (143,636) 13.00
August 31, 1997 16,782,916 $11.40 9,874,942 $ 8.65
===============================================================================
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 8/31/97 Life Price at 8/31/97 Price
$ 3 to 5 898,828 1.84 yrs. $ 4.57 898,828 $ 4.57
6 to 10 10,905,370 5.57 9.12 8,976,114 9.06
11 to 18 4,978,718 9.06 17.61 - -
$ 3 to 18 16,782,916 6.41 $11.40 9,874,942 $ 8.65
===============================================================================
Under the Walgreen Co. 1982 Employees Stock Purchase Plan, eligible employees
may purchase company stock at 90% of the fair market value at the date of
purchase. Employees may purchase shares through cash purchases, loans or
payroll deductions up to certain limits. The aggregate number of shares for
which all participants have the right to purchase under this Plan is 32,000,000.
The Walgreen Co. Restricted Performance Share Plan provides for the
granting of up to 16,000,000 shares of common stock to certain key employees,
subject to restrictions as to continuous employment except in the case of death,
normal retirement and total and permanent disability. Restrictions generally
lapse over a four-year period from the date of grant. Compensation expense is
recognized in the year of grant. Compensation expense related to the Plan was
$5 million in fiscal 1997, and $4 million in both 1996 and 1995. The number of
shares granted was 129,459 in fiscal 1997 and 176,876 in 1996.
The company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized based on the fair value of its grants under these plans. Had
compensation costs been determined consistent with the method of FASB Statement
No. 123 for options granted in 1997 and 1996, pro forma net income for fiscal
1997 and 1996 would have been $423 million and $369 million, respectively, and
pro forma earnings per common share for fiscal 1997 and 1996 would have been
$.85 and $.74, respectively. The weighted average fair value of options granted
at market price during fiscal 1997 and 1996 was $6.65 and $4.72, respectively.
The weighted average fair value of options granted below market price during
fiscal 1997 and 1996 was $6.95 and $5.11, respectively. The
weighted average exercise price of options granted at market price during fiscal
1997 and 1996, was $16.51 and $12.34, respectively. The weighted average
exercise price of options granted below market price during fiscal 1997 and
1996, was $18.40 and $13.95, respectively.
The fair value of each option grant used in the pro forma net income and
earnings per share was determined using the Black-Scholes option pricing model
with weighted-average assumptions used for grants in both fiscal 1997 and 1996:
1997 1996
Risk-Free Interest Rate 6.29% 5.99%
Average Life of Option (years) 6 6
Volatility 20.00% 19.94%
Dividend Yield 1.07% 1.07%
POSTRETIREMENT HEALTHCARE BENEFITS
The service costs and interest cost on the accumulated postretirement healthcare
benefit obligation were $4 million and $6 million, respectively, in each of the
last three fiscal years.
The company's unfunded accumulated postretirement healthcare benefit
liability at August 31, included in the Consolidated Balance Sheets were as
follows (In Millions):
1997 1996
Retirees $ 23 $ 22
Fully eligible active plan participants 12 11
Other active plan participants 54 48
Accumulated postretirement benefit obligation 89 81
Unrecognized actuarial loss (1) -
Accrued postretirement benefit liability $ 88 $ 81
====== =====
The accumulated postretirement healthcare benefit obligation was determined
assuming the discount rate was 7.75% and the healthcare cost trend rate was
7.00% for 1997 with a gradual decline over a seven-year period to 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, 1997 by $17 million and the
service and interest cost components of the fiscal 1997 net periodic
postretirement benefit cost by $3 million. The unrecognized actuarial amount is
being amortized over the average remaining service period of active plan
participants.
SUPPLEMENTARY FINANCIAL INFORMATION
Included in the Consolidated Balance Sheets captions are the following assets
and liabilities (In Millions):
1997 1996
Accounts receivable -
Accounts receivable $ 389 $ 303
Allowances for doubtful accounts (13) (15)
$ 376 $ 288
===============================================================================
Accrued expenses and other liabilities -
Accrued salaries $ 164 $ 137
Taxes other than income taxes 82 74
Profit sharing 92 74
Other 216 182
$ 554 $ 467
==============================================================================
Other non-current liabilities -
Postretirement benefit obligation $ 85 $ 78
Insurance 72 80
Accrued rent 68 57
Other 57 49
$ 282 $ 264
==============================================================================
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, 1997 and
1996, and the related consolidated statements of earnings, retained
earnings and cash flows for each of the three years in the period ended
August 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 1997 in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Chicago, Illinois,
September 26, 1997
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, 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. Arthur
Andersen and the company's General Auditor meet alone with the Audit Committee,
which also meets with the company's management to discuss financial matters,
auditing and internal accounting controls.
The company's systems are designed to provide an effective system of
internal accounting controls to obtain reasonable assurance at reasonable cost
that assets are safeguarded from material loss or unauthorized use and
transactions are executed in accordance with management's authorization and
properly recorded. To this end, management maintains an internal control
environment which is shaped by established operating policies and procedures, an
appropriate division of responsibility at all organizational levels, and a
corporate ethics policy which is monitored annually. The company also has an
Internal Control Evaluation Committee, 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.
/s/C. R. Walgreen III /s/R. H. Clausen
C. R. Walgreen III R. H. Clausen
Chairman of the Board Controller
and Chief Executive Officer and Chief Accounting Officer
/s/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
(Dollars in Millions, except per share data)
_________________Quarter Ended______________
Fiscal
November February May August Year
Fiscal 1997
Net sales $ 3,054 $ 3,603 $ 3,403 $ 3,303 $13,363
Gross profit 830 1,006 933 912 3,681
Net earnings 75 147 108 106 436
Net earnings per
common share $ .15 $ .30 $ .21 $ .22 $ .88
Fiscal 1996
Net sales $ 2,693 $ 3,179 $ 2,989 $ 2,917 $ 11,778
Gross profit 739 889 823 812 3,263
Net earnings 64 126 92 90 372
Net earnings per
common share $ .13 $ .25 $ .19 $ .18 $ .75
================================================================================
COMMON STOCK PRICES
Below are the New York Stock Exchange high and low for each quarter of fiscal
1997 and 1996.
________________Quarter Ended________________
Fiscal
November February May August Year
FISCAL 1997 High $21 7/16 $21 13/16 $23 5/8 $29 5/8 $29 5/8
Low 16 1/2 19 7/16 20 9/16 23 5/16 16 1/2
FISCAL 1996 High $15 5/8 $18 3/16 $17 7/16 $17 7/16 $18 3/16
Low 12 1/4 14 1/4 15 7/16 15 3/8 12 1/4
==============================================================================
Dividends Declared
_______________Quarter Ended_________________
Fiscal
November February May August Year
Fiscal 1997 $ .06 $ .06 $ .06 $ .06 $ .24
Fiscal 1996 $ .055 $ .055 $ .055 $ .055 $ .22
=================================================================
WALGREENS NATIONWIDE
State 1997 1996 State 1997 1996
Arizona 134 128 Nevada 11 2
Arkansas 9 8 New Hampshire 9 8
California 168 139 New Jersey 38 37
Colorado 53 49 New Mexico 37 36
Connecticut 32 32 New York 30 26
Florida 395 370 North Dakota 1 1
Illinois 330 318 Ohio 61 56
Indiana 100 103 Oklahoma 22 19
Iowa 31 30 Oregon 5 1
Kansas 17 15 Pennsylvania 5 2
Kentucky 39 36 Rhode Island 12 7
Louisiana 49 48 Tennessee 81 76
Massachusetts 72 71 Texas 234 213
Michigan 28 26 Virginia 5 2
Minnesota 62 61 Washington 19 12
Mississippi 5 5 Wisconsin 115 114
Missouri 75 71 Puerto Rico 45 42
Nebraska 29 29 TOTAL 2,358 2,193
Information is provided as of fiscal year-end.