Exhibit 13
_______________________________________________________________________________
Eleven-Year Summary of Selected Consolidated Financial Data
Walgreen Co. and Subsidiaries
(Dollars in Millions, except per share data)
________________________________________________________________________________
Fiscal Year 1998 1997 1996 1995
Net Sales $15,307 $13,363 $11,778 $10,395
Costs and Deductions
Cost of sales 11,140 9,682 8,515 7,482
Selling, occupancy and
administration 3,332 2,973 2,659 2,393
Other (income) expense (1) (42) (4) (3) (4)
Total Costs and Deductions 14,430 12,651 11,171 9,871
Earnings
Earnings before income tax
provision and cumulative effect
of accounting changes 877 712 607 524
Income tax provision 340 276 235 203
Earnings before cumulative effect
of accounting changes 537 436 372 321
Cumulative effect of accounting
changes (2) (26) - - -
Net Earnings $ 511 $ 436 $ 372 $ 321
Per Common Share (3)
Earnings before cumulative effect
of accounting changes
Basic $ 1.08 $ .89 $ .76 $ .65
Diluted 1.07 .88 .75 .65
Net earnings
Basic 1.03 .89 .76 .65
Diluted 1.02 .88 .75 .65
Dividends declared .25 .24 .22 .20
Book value 5.72 4.81 4.15 3.64
Non-Current Liabilities
Long-term debt $ 14 $ 3 $ 4 $ 2
Deferred income taxes 89 113 145 142
Other non-current liabilities 370 279 260 238
Assets and Equity
Total assets $ 4,902 $ 4,207 $ 3,634 $ 3,253
Shareholders' equity $ 2,849 $ 2,373 $ 2,043 $ 1,793
Return on average shareholders'
equity 19.6% 19.8% 19.4% 19.1%
<FN>
(1) Fiscal 1998 includes a pre-tax gain of $37 million ($23 million after-tax
or $.05 per share) from the sale of the company's long-term care pharmacy
business.
(2) Fiscal 1998 includes the $26 million ($.05 per share) charge from the
cumulative effect of accounting change for system development costs.
Fiscal 1993 includes the $24 million ($.05 per share) costs from the
cumulative effect of accounting changes for postretirement benefits and
income taxes.
(3) Per share data have been adjusted for two-for-one stock splits in 1997, 1995
and 1991.
1994 1993 1992 1991 1990 1989 1988
$ 9,235 $8,295 $7,475 $6,733 $6,047 $5,380 $4,884
6,615 5,959 5,378 4,829 4,356 3,849 3,469
2,165 1,930 1,739 1,583 1,407 1,278 1,190
(3) 7 5 9 3 9 16
8,777 7,896 7,122 6,421 5,766 5,136 4,675
458 399 353 312 281 244 209
176 154 132 117 106 90 80
282 245 221 195 175 154 129
- (24) - - - - -
$ 282 $ 221 $ 221 $ 195 $ 175 $ 154 $ 129
$ .57 $ .50 $ .45 $ .40 $ .35 $ .31 $ .26
.57 .50 .45 .39 .35 .31 .26
.57 .45 .45 .40 .35 .31 .26
.57 .45 .45 .39 .35 .31 .26
.17 .15 .13 .12 .10 .09 .08
3.20 2.80 2.51 2.20 1.92 1.67 1.45
$ 2 $ 6 $ 19 $ 123 $ 147 $ 150 $ 172
138 144 172 155 139 118 106
214 176 104 85 77 69 55
$2,873 $2,506 $2,347 $2,074 $1,896 $1,666 $1,501
$1,574 $1,379 $1,233 $1,081 $ 947 $ 823 $ 713
19.1% 18.8% 19.1% 19.2% 19.7% 20.1% 19.3%
_____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Fiscal 1998 was the twenty-fourth consecutive year of record sales and earnings.
Net earnings were $511 million or $1.02 per share (diluted), an increase of
17.2% from last year's earnings of $436 million or $.88 per share. Included in
this year's results was a $26 million after-tax charge ($.05 per share) related
to an accounting change and an offsetting $.05 per share gain on the sale of the
company's long-term care pharmacy business which was recorded in the fiscal
fourth quarter. The accounting change involved expensing the cumulative cost of
business process reengineering activities that had been capitalized as part of
system development projects. Operating earnings increases resulted from higher
sales and improved expense ratios.
[BAR GRAPH] S,G&A 1996-1998
(as a percent to sales)
1996 1997 1998
22.6% 22.2% 21.8%
Total net sales increased by 14.5% to $15.3 billion in fiscal 1998 compared
to increases of 13.5% in 1997 and 13.3% in 1996. Drugstore sales increases
resulted from sales gains in existing stores and added sales from new stores,
each of which include an indeterminate amount of market-driven price changes.
Comparable drugstore (those open at least one year) sales were up 9.4% in 1998,
8.1% in 1997, and 8.5% in 1996. New store openings accounted for 10.4% of the
sales gains in 1998, 8.6% in 1997, and 7.6% in 1996. The company operated 2,549
drugstores as of August 31, 1998, compared to 2,358 a year earlier.
Prescription sales increased 20.6% in 1998, 18.1% in 1997, and 18.0% in
1996. Comparable drugstores were up 15.6% in 1998 and 13.0% in 1997 and 1996.
Prescription sales were 49.6% of total sales for fiscal 1998 compared to 47.1%
in 1997 and 45.2% in 1996. Pharmacy sales trends are expected to continue
primarily because of expansion into new markets, increased penetration in
existing markets, and demographic changes such as the aging population.
Gross margins as a percent of sales decreased to 27.2% of sales from 27.5%
last year and 27.7% in fiscal 1996. The two major factors contributing to the
decrease were the decline in pharmacy gross profit margins and the LIFO
provision.
Third party retail and mail order sales, which have lower gross margin rates
compared to the rest of the store, continue to become a larger portion of
pharmacy sales. The margins are under continued pressure from the reimbursement
rates demanded by managed care organizations. The company is responding to
these gross margin pressures by evaluating contracts with the organizations on a
case by case basis to insure a reasonable return to shareholders. This may
result in sacrificing sales volume to insure that minimum gross margin standards
are met. Improved gross margins in the rest of the store helped offset the
decline.
The company uses the last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were 2.15% in 1998, .82% in 1997,
and .68% in 1996, which resulted in charges to cost of sales of $47 million in
1998, $16 million in 1997, and $13 million in 1996. Inflation on prescription
inventory was 5.5% in 1998, 1.9% in 1997, and 2.3% in 1996.
Selling, occupancy and administration expenses were 21.8% of sales in fiscal
1998, 22.2% of sales in fiscal 1997, and 22.6% of sales in fiscal 1996. The
fiscal 1998 decrease, as a percent to sales, was caused by lower payroll,
advertising and headquarters expenses. The fiscal 1997 decrease, as a percent
to sales, was caused principally by lower advertising expenses. The growth in
mail order pharmacy, which has a lower expense ratio, has also been contributing
to the decreases.
Interest income was relatively constant over the three year periods.
Average net investment levels were approximately $72 million in 1998, $79
million in 1997, and $76 million in 1996.
The fiscal 1998, 1997 and 1996 effective tax rates were 38.75%.
Financial Condition
Cash and cash equivalents were $144 million at August 31, 1998, compared to
$73 million at August 31, 1997. Short-term investment objectives are to
maximize yields while minimizing risk and maintaining liquidity. To attain
these objectives, investment limits are placed on the amount, type and issuer of
securities.
Net cash provided by operating activities for fiscal 1998 was $571 million
compared to $650 million a year ago. The company's profitability is the
principal source for providing funds for expansion and remodeling programs,
dividends to shareholders and funding for various technological improvements.
Net cash used for investing activities was $502 million in fiscal 1998 and
$486 million in 1997. Additions to property and equipment were $641 million
compared to $485 million last year. During the year, 304 new or relocated
drugstores were opened. This compares to 251 new or relocated drugstores opened
in the same period last year. New stores are owned or leased. There were 136
owned locations opened during the year or under construction at August 31, 1998
versus 110 for the same period last year. The surrender of certain corporate-
owned life insurance policies resulted in net proceeds of $58 million. Property
and equipment dispositions of $72 million in fiscal 1998 includes the proceeds
from the sale of the company's 14 long-term care pharmacy facilities.
[PIE CHART] Capital Expenditures-FY 1999
More than $750 million to be spent
-Stores (67%)
-Distribution (21%)
-Technology (10%)
-Other (2%)
Capital expenditures for fiscal 1999 are estimated to be more than $750
million. The company expects to open at least 365 new stores in fiscal 1999.
The company is continuing to relocate stores to more convenient and profitable
freestanding locations. Expectations are that 3,000 drugstores will be
operating in the year 2000, with a goal of 6,000 by 2010. This may necessitate
future long-term borrowings.
Net cash provided by financing activities was $2 million compared to $100
million used a year ago. The company issued 4.5 million shares of authorized
but previously unissued shares to satisfy various stock option and purchase plan
requirements. This avoided purchasing shares on the open market which would
have resulted in cash outflows of approximately $111 million. At August 31,
1998, the company had $162 million in unused bank lines of credit and $100
million of unissued authorized debt securities, previously filed with the
Securities and Exchange Commission.
The company has been addressing computer software and hardware modifications
or replacements to enable transactions to process properly in the year 2000.
Included in the hardware review is an examination of critical non-IT systems,
including embedded technology at company facilities. Left uncorrected, the
"year 2000 problem" could result in business interruptions. However, based on
currently available information, all necessary changes are expected to occur in
a timely manner. As part of the project, a detailed work plan was developed to
identify key processes such as point-of-sale, pharmacy and inventory control.
At August 31, 1998, it is estimated that 70% of the work plan activities have
been completed and approximately 50% of the costs have been incurred. The total
cost of these changes is expected to be approximately $10 million which is based
on management's best estimates and subject to change as additional information
becomes available.
Although the company is working with suppliers and customers regarding this
issue, no assurance can be given with respect to any potential adverse effects
on the company or any failure by other parties to achieve year 2000 compliance.
The company is developing contingency plans which identify "risk points" within
key business processes and is developing alternative solutions if a failure
occurs at a risk point. Any unexpected problems which occur concerning this
issue will be attacked vigorously and, if necessary, workarounds will be
pursued.
In March 1998, Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" was issued. This
pronouncement, which is effective by the company's fiscal year 2000, provides
guidance on the capitalization of costs related to internal use software. The
pronouncement is not expected to materially impact the company's consolidated
financial position or results of operations.
In April 1998 Statement of Position 98-5 "Reporting on the Costs of Start-
up Activities" was issued. This pronouncement requires that costs related to
start-up activities be expensed as incurred. The company's policies are in
compliance with this pronouncement, and therefore, no adjustments are necessary.
Cautionary Note Regarding Forward-looking Statements
Certain statements and projections of future results made in this report
constitute forward-looking information that is based on current market,
competitive and regulatory expectations and involve risks and uncertainties.
Please see Walgreen Co.'s Form 10-K for the period ended August 31, 1998, for a
discussion of certain important factors as they relate to forward-looking
statements. Actual results could differ materially.
Consolidated Statements of Earnings and Shareholders' Equity
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1998, 1997 and 1996
(Dollars in Millions, except per share data)
_______________________________________________________________________________
Earnings 1998 1997 1996
Net Sales $15,307 $13,363 $11,778
Costs and Deductions
Cost of sales 11,140 9,682 8,515
Selling, occupancy and administration 3,332 2,973 2,659
14,472 12,655 11,174
Other (Income) Expense
Interest income (6) (6) (5)
Interest expense 1 2 2
Gain on sale of long-term care pharmacies (37) - -
(42) (4) (3)
Earnings
Earnings before income tax provision
and cumulative effect of accounting change 877 712 607
Income tax provision 340 276 235
Earnings before cumulative effect of
accounting change 537 436 372
Cumulative effect of accounting change
for system development costs (26) - -
Net Earnings $ 511 $ 436 $ 372
_______________________________________________________________________________
Net Earnings per Common Share
Basic
Earnings before cumulative effect of
accounting change $ 1.08 $ .89 $ .76
Cumulative effect of accounting change
for system development costs (.05) - -
Net Earnings $ 1.03 $ .89 $ .76
Diluted
Earnings before cumulative effect of
accounting change $ 1.07 $ .88 $ .75
Cumulative effect of accounting change
for system development costs (.05) - -
Net Earnings $ 1.02 $ .88 $ .75
Average shares outstanding 496,084,620 492,440,738 492,282,144
Dilutive effect of stock options 6,761,836 5,893,807 4,589,866
Average shares outstanding assuming dilution 502,846,456 498,334,545 496,872,010
Common Stock Paid-in Retained
Shareholders' Equity Shares Amount Capital Earnings
Balance, August 31, 1995 492,282,144 $ 77 $ - $ 1,716
Net earnings - - - 372
Cash dividends declared ($.22 per share) - - - (109)
Employee stock purchase and option plans - - - (13)
Balance, August 31, 1996 492,282,144 77 - 1,966
Net earnings - - - 436
Cash dividends declared ($.24 per share) - - - (118)
Employee stock purchase and option plans 1,507,822 - 30 (18)
Balance, August 31, 1997 493,789,966 77 30 2,266
Net earnings - - - 511
Cash dividends declared ($.25 per share) - - - (124)
Employee stock purchase and option plans 4,453,556 1 88 -
Balance, August 31, 1998 498,243,522 $ 78 $ 118 $ 2,653
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
Consolidated Balance Sheets
Walgreen Co. and Subsidiaries
At August 31, 1998 and 1997
(Dollars in Millions)
________________________________________________________________________________
Assets 1998 1997
Current Assets
Cash and cash equivalents $ 144 $ 73
Accounts receivable, net 373 376
Inventories 2,027 1,733
Other current assets 79 144
Total Current Assets 2,623 2,326
Non-Current Assets
Property and equipment, at cost, less accumulated
depreciation and amortization 2,144 1,754
Other non-current assets 135 127
Total Assets $ 4,902 $ 4,207
________________________________________________________________________________
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $ 907 $ 813
Accrued expenses and other liabilities 618 554
Income taxes 55 72
Total Current Liabilities 1,580 1,439
Non-Current Liabilities
Deferred income taxes 89 113
Other non-current liabilities 384 282
Total Non-Current Liabilities 473 395
Shareholders' Equity
Preferred stock, $.125 par value; authorized
16 million shares; none issued - -
Common stock, $.15625 par value; authorized 1.6 billion
shares; issued and outstanding 498,243,522 in 1998
and 493,789,966 in 1997 78 77
Paid-in capital 118 30
Retained earnings 2,653 2,266
Total Shareholders' Equity 2,849 2,373
Total Liabilities and Shareholders' Equity $ 4,902 $ 4,207
________________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
Consolidated Statements of Cash Flows
Walgreen Co. and Subsidiaries
For the Years Ended August 31, 1998, 1997 and 1996
(Dollars in Millions)
_______________________________________________________________________________
Fiscal Year 1998 1997 1996
Cash Flows from Operating Activities
Net earnings $ 511 $ 436 $ 372
Adjustments to reconcile net earnings to net
cash provided by operating activities -
Cumulative effect of accounting
change for system development costs 26 - -
Depreciation and amortization 189 164 147
Gain on sale of long-term care pharmacies (37) - -
Deferred income taxes (1) 8 3
Other 29 8 5
Changes in operating assets and
liabilities -
Inventories (299) (101) (178)
Accrued expenses and other liabilities 99 73 42
Trade accounts payable 94 121 85
Accounts receivable, net (20) (74) (60)
Income taxes (17) 12 (9)
Other (3) 3 4
Net cash provided by operating activities 571 650 411
Cash Flows from Investing Activities
Additions to property and equipment (641) (485) (364)
Disposition of property and equipment 72 15 18
Proceeds from the surrender of corporate-
owned life insurance 58 - -
Net borrowing from (investment in)
corporate-owned life insurance 9 (16) 47
Net cash used for investing activities (502) (486) (299)
Cash Flows from Financing Activities
Cash dividends paid (123) (116) (105)
Proceeds from (purchases for) employee
stock plans 105 17 (20)
Other 20 (1) -
Net cash provided by (used for) financing
activities 2 (100) (125)
Changes in Cash and Cash Equivalents
Net increase (decrease) in cash and
cash equivalents 71 64 (13)
Cash and cash equivalents at
beginning of year 73 9 22
Cash and cash equivalents at
end of year $ 144 $ 73 $ 9
_______________________________________________________________________________
The accompanying Statement of Major Accounting Policies and the Notes to
Consolidated Financial Statements are integral parts of these statements.
Statement of Major Accounting Policies
Description of Business
The company is principally in the retail drugstore business. Stores are located
in 35 states and Puerto Rico. At August 31, 1998, there were 2,547 retail
drugstores and two mail service facilities. Prescription sales were 49.6% of
total sales for fiscal 1998 compared to 47.1% in 1997 and 45.2% in 1996.
Accounting Change
In accordance with the EITF (Emerging Issues Task Force) consensus reached on
November 20,1997, the company was required to change its accounting for business
process reengineering costs. EITF 97-13 "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology Transformation,"
requires that the cost of business process reengineering activities that are
part of a project to acquire, develop or implement internal use software,
whether done internally or by third parties, be expensed as incurred.
Previously, the company capitalized these costs as systems development costs.
The change, effective as of September 1, 1997, resulted in a cumulative pre-tax
charge of $43 million, or $.05 per share, recorded in the quarter ended November
30, 1997. No restatement of prior years' financial statements was required.
Except for the cumulative effect of the accounting change, the effect of this
change on the current year and prior years is not material.
Basis of Presentation
The consolidated statements include the accounts of the company and its
subsidiaries. All significant intercompany transactions have been eliminated.
The financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's prudent
judgments and estimates. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments
with an original maturity of three months or less. The company's cash
management policy provides for the bank disbursement accounts to be reimbursed
on a daily basis. Checks issued but not presented to the banks for payment of
$148 million and $145 million at August 31, 1998 and 1997, respectively, are
included in cash and cash equivalents as reductions of other cash balances.
Financial Instruments
The company had approximately $53 million and $38 million of outstanding letters
of credit at August 31, 1998 and 1997, respectively, which guaranteed foreign
trade purchases. Additional outstanding letters of credit of $41 million and
$59 million at August 31, 1998 and 1997, respectively, guaranteed payments of
casualty claims. The casualty claim letters of credit are annually renewable
and will remain in place until the casualty claims are paid in full. The
company pays a nominal facility fee to the financing bank to keep this line of
credit facility active. The company also had purchase commitments of
approximately $242 million and $209 million at August 31, 1998 and 1997,
respectively, related to the purchase of store locations. There were no
investments in derivative financial instruments during fiscal 1998 and 1997.
Inventories
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market
basis. At August 31, 1998 and 1997, inventories would have been greater by
$491 million and $444 million, respectively, if they had been valued on a lower
of first-in, first-out (FIFO) cost or market basis. Cost of sales is primarily
derived from an estimate based upon point-of-sale scanning information and
adjusted based on periodic inventories.
Property and Equipment
Depreciation is provided on a straight-line basis over the estimated useful
lives of owned assets. Leasehold improvements and leased properties under
capital leases are amortized over the estimated physical life of the property or
over the term of the lease, whichever is shorter. Estimated useful lives range
from 12 1/2 to 39 years for land improvements, buildings and building
improvements and 5 to 12 1/2 years for equipment. Major repairs which extend
the useful life of an asset are capitalized in the property and equipment
accounts. Routine maintenance and repairs are charged against earnings. The
composite method of depreciation is used for equipment; therefore, gains and
losses on retirement or other disposition of such assets are included in
earnings only when an operating location is closed, completely remodeled or
impaired resulting in the carrying amount not being recoverable. Undiscounted
future cash flows are used to determine if impairment has occurred. Impaired
amounts are determined by comparing the present value of estimated future cash
flows to the carrying value of their assets. Fully depreciated property and
equipment are removed from the cost and related accumulated depreciation and
amortization accounts.
Property and equipment consists of (In Millions):
1998 1997
Land and land improvements
Owned stores $ 360 $ 217
Distribution centers 21 19
Other locations 9 9
Buildings and building improvements
Leased stores (leasehold improvements only) 404 337
Owned stores 346 261
Distribution centers 159 117
Other locations 45 41
Equipment
Stores 908 783
Distribution centers 187 162
Other locations 384 383
Capitalized system development costs 123 154
Capital lease properties 15 19
2,961 2,502
Less: accumulated depreciation and amortization 817 748
$ 2,144 $ 1,754
The company capitalizes costs which primarily relate to the application
development stage of significant internally developed software. These costs
principally relate to Intercom Plus, a pharmacy computer and workflow system,
and SIMS inventory management system. These costs are amortized over a five-
year period as phases of these systems are implemented. Unamortized costs as of
August 31, 1998 and 1997, were $53 million and $97 million, respectively.
Amortization of these costs were $13 million in 1998, $14 million in 1997 and
$11 million in 1996.
Income Taxes
The company provides for federal and state income taxes on items included in the
Consolidated Statements of Earnings regardless of the period when such taxes are
payable. Deferred taxes are recognized for temporary differences between
financial and income tax reporting based on enacted tax laws and rates.
Retirement Benefits
The principal retirement plan for employees is the Walgreen Profit-Sharing
Retirement Trust, to which both the company and the employees contribute. The
company's contribution, which is determined annually at the discretion of the
Board of Directors, has historically related to pre-tax income. The
profit-sharing provision was $79 million in 1998, $59 million in 1997 and
$50 million in 1996.
The company provides certain health and life insurance benefits for retired
employees who meet eligibility requirements, including age and years of service.
The costs of these benefits are accrued over the period earned. The company's
postretirement benefit plans currently are not funded.
Insurance
The company obtains insurance coverage for catastrophic exposures as well as
those risks required to be insured by law. It is the company's policy to retain
a significant portion of certain losses related to worker's compensation,
property losses, business interruptions relating from such losses and
comprehensive general, pharmacist and vehicle liability. Provisions for these
losses are recorded based upon the company's estimates for claims incurred.
Such estimates utilize certain assumptions followed in the insurance industry.
Net Earnings Per Common Share
Financial Accounting Standards Board(FASB) Statement No. 128 "Earnings Per
Share" was adopted by the company in the quarter ended February 28, 1998.
"Basic earnings per share" and "diluted earnings per share," as defined by the
bulletin, replaced "primary earnings per share" and "fully diluted earnings per
share." Earnings per share have been restated for prior periods.
Pre-Opening Expenses
Non-capital expenditures incurred prior to the opening of a new or remodeled
store are charged against earnings when they are incurred.
Advertising Costs
Advertising costs are expensed as incurred, and were $60 million in 1998,
$68 million in 1997 and $82 million in 1996.
Notes to Consolidated Financial Statements
Interest Expense
The company capitalized $2 million of interest expense as part of
significant construction projects during fiscal 1998 and less than $1 million
during fiscal 1997 and 1996. Interest paid, net of amounts capitalized, was $1
million in 1998, $2 million in 1997 and $3 million in 1996.
Gain on Sale of Long-Term Care Pharmacies
In June 1998, the company completed the sale of its long-term care pharmacy
business for a pre-tax gain of $37 million ($23 million after-tax or $.05 per
share). The 14 units generated revenues of approximately $40 million a year.
Leases
Although some locations are owned, the company generally operates in leased
premises. Original non-cancelable lease terms typically are 20 years and may
contain escalation clauses, along with options that permit renewals for
additional periods. The total amount of the minimum rent is expensed on a
straight-line basis over the term of the lease. In addition to minimum fixed
rentals, most leases provide for contingent rentals based upon sales.
Minimum rental commitments at August 31, 1998, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Millions):
Year
1999 $ 441
2000 473
2001 460
2002 446
2003 432
Later 4,772
Total minimum lease payments $7,024
The above minimum lease payments include minimum rental commitments related to
capital leases amounting to $8 million at August 31, 1998. The present value
of net minimum capital lease payments, due after 1999, are reflected in the
accompanying Consolidated Balance Sheets as part of other non-current
liabilities. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately $21 million on leases due in the future under
non-cancelable subleases.
Rental expense was as follows (In Millions):
1998 1997 1996
Minimum rentals $ 406 $ 357 $ 318
Contingent rentals 35 35 36
Less: Sublease rental income (4) (3) (3)
$ 437 $ 389 $ 351
Income Taxes
The provision for income taxes consists of the following (In Millions):
1998 1997 1996
Current provision -
Federal $ 290 $ 228 $ 196
State 51 40 36
341 268 232
Deferred provision -
Federal (2) 7 3
State 1 1 -
(1) 8 3
$ 340 $ 276 $ 235
The components of the deferred provision were (In Millions):
1998 1997 1996
Accelerated depreciation $ 22 $ 9 $ 12
Employee benefit plans (10) (14) (15)
Inventory (3) 22 1
Other (10) (9) 5
$ (1) $ 8 $ 3
The deferred tax assets and liabilities included in the Consolidated Balance
Sheets consist of the following (In Millions):
1998 1997
Deferred tax assets -
Employee benefit plans $ 105 $ 95
Insurance 39 41
Accrued rent 41 35
Inventory 16 15
Other 44 28
245 214
Deferred tax liabilities -
Accelerated depreciation 231 225
Inventory 53 55
Other 19 9
303 289
Net deferred tax liabilities $ 58 $ 75
Income taxes paid were $333 million, $243 million and $241 million during the
fiscal years ended August 31, 1998, 1997 and 1996, respectively. The difference
between the statutory income tax rate and the effective tax rate is principally
due to state income tax provisions.
Short-Term Borrowings
The company obtained funds through the placement of commercial paper, as
follows (Dollars in Millions):
1998 1997 1996
Average outstanding during the year $ 18 $ 8 $ 19
Largest month-end balance 50 42 77
(Oct) (Sept) (Nov)
Weighted average interest rate 5.7% 5.4% 5.8%
There were no short-term borrowings at August 31, 1998 or August 31, 1997. At
August 31, 1998 the company had approximately $162 million of available bank
lines of credit. The credit lines are renewable annually at various dates and
provide for loans of varying maturities at the prime rate. There are no
compensating balance arrangements.
Contingencies
The company is involved in various legal proceedings incidental to the normal
course of business. Company management is of the opinion, based upon the advice
of General Counsel, that although the outcome of such litigation cannot be
forecast with certainty, the final disposition should not have a material
adverse effect on the company's consolidated financial position or results of
operations.
Capital Stock
The company's common stock is subject to a Rights Agreement under which each
share has attached to it a Right to purchase one one-hundredth of a share of a
new series of Preferred Stock, at a price of $75.00 per Right, In the event an
entity acquires or attempts to acquire 15% of the then outstanding shares, each
Right, except those of an acquiring entity, would entitle the holder to purchase
a number of shares of common stock pursuant to a formula contained in the
Agreement. These non-voting Rights will expire on August 21, 2006, but may be
redeemed at a price of $.005 per Right at any time prior to a public
announcement that the above event has occurred.
As of August 31, 1998, 57,364,515 shares of common stock were reserved for
future stock issuances under the company's employee stock purchase, option and
award plans. Preferred stock of 4,982,435 shares have been reserved for
issuance upon the exercise of Preferred Share Purchase Rights.
Stock Compensation Plans
The Walgreen Co. Executive Stock Option Plan provides for the granting to key
employees of options to purchase company common stock over a 10-year period, at
a price not less than the fair market value on the date of the grant. Under
this Plan, options may be granted until October 9, 2006, for an aggregate of
19,200,000 shares of common stock of the company. The options granted during
fiscal 1998, 1997 and 1996 have a minimum three-year holding period.
The Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) provides for
the granting of options to purchase company common stock over a period of 10
years to eligible employees upon the purchase of company shares subject to
certain restrictions. Under the terms of the Plan, the option price cannot be
less than 85% of the fair market value at the date of grant. Compensation
expense related to the Plan was less than $1 million in fiscal 1998, 1997 and
1996. Options may be granted under this Plan until September 30, 2002, for an
aggregate of 20,000,000 shares of common stock of the company. The options
granted during fiscal 1998, 1997 and 1996 have a two-year holding period.
A summary of information relative to the company's stock option plans follows:
Options Outstanding Options Exercisable
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
August 31, 1995 14,955,620 $ 8.36
Granted 299,136 12.95
Exercised (758,300) 7.69
Canceled/Forfeited (42,848) 9.63
August 31, 1996 14,453,608 $ 8.49 10,741,596 $ 8.04
Granted 4,706,936 17.97
Exercised (2,233,992) 6.26
Canceled/Forfeited (143,636) 13.00
August 31, 1997 16,782,916 $11.40 9,874,942 $ 8.65
Granted 986,081 28.04
Exercised (2,833,841) 7.55
Canceled/Forfeited (132,178) 17.08
August 31, 1998 14,802,978 $13.18 9,127,669 $ 9.24
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 8/31/98 Life Price at 8/31/98 Price
$ 3 to 7 804,093 1.98 yrs. $ 5.99 804,093 $ 5.99
8 to 16 9,563,130 5.38 10.38 8,323,576 9.56
17 to 37 4,435,755 8.38 20.53 - -
$ 3 to 37 14,802,978 6.09 yrs. $13.18 9,127,669 $ 9.24
Under the Walgreen Co. 1982 Employees Stock Purchase Plan, eligible employees
may purchase company stock at 90% of the fair market value at the date of
purchase. Employees may purchase shares through cash purchases, loans or
payroll deductions up to certain limits. The aggregate number of shares for
which all participants have the right to purchase under this Plan is 32,000,000.
The Walgreen Co. Restricted Performance Share Plan provides for the
granting of up to 16,000,000 shares of common stock to certain key employees,
subject to restrictions as to continuous employment except in the case of death,
normal retirement and total and permanent disability. Restrictions generally
lapse over a four-year period from the date of grant. Compensation expense is
recognized in the year of grant. Compensation expense related to the Plan was
$5 million in both fiscal 1998 and 1997, and $4 million in fiscal 1996. The
number of shares granted was 65,175 in fiscal 1998, 108,676 in fiscal 1997 and
129,456 in 1996.
The company applies Accounting Principles Board(APB) Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized based on the fair value of its grants
under these plans. Had compensation costs been determined consistent with the
method of FASB Statement No. 123 for options granted in fiscal 1998, 1997 and
1996, pro forma net earnings and net earnings per common share would have been
as follows (In Millions, except per share data):
1998 1997 1996
Net earnings
As reported $ 511 $ 436 $ 372
Pro forma 497 423 369
Net earnings per common share - Basic
As reported 1.03 .89 .76
Pro forma 1.00 .86 .75
Net earnings per common chare - Diluted
As reported 1.02 .88 .75
Pro forma .99 .85 .74
The weighted-average fair value and exercise price of options granted for fiscal
1998, 1997 and 1996 were as follows:
1998 1997 1996
Granted at market price -
Weighted-average fair value $10.54 $ 6.65 $ 4.72
Weighted-average exercise price 28.16 16.51 12.34
Granted below market price -
Weighted-average fair value 9.62 6.95 5.11
Weighted-average exercise price 27.65 18.40 13.95
The fair value of each option grant used in the pro forma net earnings and net
earnings per share was determined using the Black-Scholes option pricing model
with weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996:
1998 1997 1996
Risk-free interest rate 6.19% 6.29% 5.99%
Average life of option (years) 7 6 6
Volatility 20.39% 20.00% 19.94%
Dividend yield .53% 1.07% 1.07%
Postretirement Healthcare Benefits
The components of the postretirement healthcare benefits costs for the last
three fiscal years were as follows (In Millions):
1998 1997 1996
Service cost $ 4 $ 4 $ 4
Interest cost 7 6 6
Total postretirement healthcare benefits costs $11 $10 $10
The company's unfunded accumulated postretirement healthcare benefit
liabilities at August 31, included in the Consolidated Balance Sheets, were as
follows (In Millions):
1998 1997
Retirees $ 27 $ 23
Fully eligible active plan participants 15 12
Other active plan participants 64 54
Accumulated postretirement benefit obligation 106 89
Unrecognized actuarial loss (10) (1)
Accrued postretirement benefit liability $ 96 $ 88
The accumulated postretirement healthcare benefit obligation was determined
assuming the discount rate was 7.0% and the healthcare cost trend rate was
7.0% for 1998 with a gradual decline over a six-year period to 5.0%. These
trend rates reflect the company's prior experience and management's expectation
that future rates will decline. The effect of a 1% increase each year in the
projected healthcare cost trend rate would increase the accumulated
postretirement benefit obligation at August 31, 1998, by $21 million and the
service and interest cost components of the fiscal 1998 net periodic
postretirement benefit cost by $3 million. The unrecognized actuarial amount is
being amortized over the average remaining service period of active plan
participants.
Supplementary Financial Information
Included in the Consolidated Balance Sheets captions are the following assets
and liabilities (In Millions):
1998 1997
Accounts receivable -
Accounts receivable $ 384 $ 389
Allowances for doubtful accounts (11) (13)
$ 373 $ 376
Accrued expenses and other liabilities -
Accrued salaries $ 196 $ 164
Taxes other than income taxes 85 82
Profit sharing 99 92
Other 238 216
$ 618 $ 554
Summary of Quarterly Results (Unaudited)
(Dollars in Millions, except per share data)
----------------Quarter Ended--------------
Fiscal
November February May August Year
Fiscal 1998
Net sales $ 3,485 $ 4,094 $ 3,887 $ 3,841 $ 15,307
Gross profit 944 1,133 1,047 1,043 4,167
Earnings before
cumulative
effect of
accounting
change 87 171 127 152 537
Net Earnings 61 171 127 152 511
Per Common Share -
Basic
Earnings before
cumulative effect
of accounting
change $ .18 $ .34 $ .26 $ .30 $ 1.08
Net Earnings .13 .34 .26 .30 1.03
Diluted
Earnings before
cumulative effect
of accounting
change .18 .34 .25 .30 1.07
Net Earnings .13 .34 .25 .30 1.02
Fiscal 1997
Net sales $ 3,054 $ 3,603 $ 3,403 $ 3,303 $ 13,363
Gross profit 830 1,006 933 912 3,681
Net earnings 75 147 108 106 436
Per Common Share -
Basic $ .15 $ .30 $ .22 $ .22 $ .89
Diluted .15 .30 .21 .22 .88
Comments on Quarterly Results
The quarter ended August 31, 1998, includes the pre-tax gain of $37 million ($23
million after-tax or $.05 per share) from the sale of the company's long-term
care pharmacy business.
Common Stock Prices
Below are the New York Stock Exchange high and low for each quarter of fiscal
1998 and 1997.
________________Quarter Ended________________
Fiscal
November February May August Year
Fiscal 1998 High $32 3/4 $37 1/8 $36 9/16 $48 15/16 $48 15/16
Low 25 5/8 28 1/4 32 7/8 36 3/16 25 5/8
Fiscal 1997 High $21 7/16 $21 13/16 $23 5/8 $29 5/8 $29 5/8
Low 16 1/2 19 7/16 20 9/16 23 5/16 16 1/2
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Walgreen Co.:
We have audited the accompanying consolidated balance sheets of Walgreen
Co. (an Illinois corporation) and Subsidiaries as of August 31, 1998 and
1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended
August 31, 1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Walgreen Co.
and Subsidiaries as of August 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois,
September 25, 1998
Management's Report
The primary responsibility for the integrity and objectivity of the consolidated
financial statements and related financial data rests with the management of
Walgreen Co. The financial statements were prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and
included amounts that were based on management's most prudent judgments and
estimates relating to matters not concluded by fiscal year-end. Management
believes that all material uncertainties have been either appropriately
accounted for or disclosed. All other financial information included in this
annual report is consistent with the financial statements.
The firm of Arthur Andersen LLP, independent public accountants, was
engaged to render a professional opinion on Walgreen Co.'s consolidated
financial statements. Their report contains an opinion based on their audit,
which was made in accordance with generally accepted auditing standards and
procedures, which they believed were sufficient to provide reasonable assurance
that the consolidated financial statements, considered in their entirety, are
not misleading and do not contain material errors.
Three outside members of the Board of Directors constitute the company's
Audit Committee, which meets at least quarterly and is responsible for reviewing
and monitoring the company's financial and accounting practices. Arthur
Andersen LLP and the company's General Auditor meet alone with the Audit
Committee, which also meets with the company's management to discuss financial
matters, auditing and internal accounting controls.
The company's systems are designed to provide an effective system of
internal accounting controls to obtain reasonable assurance at reasonable cost
that assets are safeguarded from material loss or unauthorized use and
transactions are executed in accordance with management's authorization and
properly recorded. To this end, management maintains an internal control
environment which is shaped by established operating policies and procedures, an
appropriate division of responsibility at all organizational levels, and a
corporate ethics policy which is monitored annually. The company also has an
Internal Control Evaluation Committee, composed primarily of senior management
from the Accounting and Auditing Departments, which oversees the evaluation of
internal controls on a company-wide basis. Management believes it has
appropriately responded to the internal auditors' and independent public
accountants' recommendations concerning the company's internal control system.
/s/ L. D. Jorndt /s/ W. M. Rudolphsen
President Controller
and Chief Executive Officer and Chief Accounting Officer
/s/ R. L. Polark
Senior Vice President
and Chief Financial Officer
Walgreens Nationwide
State 1998 1997 State 1998 1997
Alabama 1 0
Arizona 137 134 Nevada 16 11
Arkansas 9 9 New Hampshire 9 9
California 196 168 New Jersey 40 38
Colorado 53 53 New Mexico 40 37
Connecticut 32 32 New York 34 30
Florida 412 395 North Dakota 1 1
Illinois 345 330 Ohio 76 61
Indiana 103 100 Oklahoma 26 22
Iowa 33 31 Oregon 12 5
Kansas 20 17 Pennsylvania 7 5
Kentucky 39 39 Rhode Island 14 12
Louisiana 55 49 Tennessee 85 81
Massachusetts 73 72 Texas 261 234
Michigan 40 28 Virginia 12 5
Minnesota 64 62 Washington 22 19
Mississippi 7 5 Wisconsin 119 115
Missouri 82 75 Puerto Rico 44 45
Nebraska 30 29 Total 2,549 2,358
Information is provided as of fiscal year-end.