-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TrPXvkbm+cO4e1gO/WZhXN+hs8CwuKqtKkjhPUoj7/Brs+Ok3rBTc0spJ3/Q02TG 3BYeADvfMeEtHvc1z9W9cQ== 0000104207-99-000001.txt : 19990113 0000104207-99-000001.hdr.sgml : 19990113 ACCESSION NUMBER: 0000104207-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALGREEN CO CENTRAL INDEX KEY: 0000104207 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 361924025 STATE OF INCORPORATION: IL FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00604 FILM NUMBER: 99505011 BUSINESS ADDRESS: STREET 1: 200 WILMOT RD CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479402500 MAIL ADDRESS: STREET 1: 200 WILMOT RD CITY: DEERFIELD STATE: IL ZIP: 60015 10-Q 1 WALGREEN CO. 10-Q FOR THE QUARTER ENDED 11/30/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______to _______ Commission File Number 1-604 WALGREEN CO. (Exact name of registrant as specified in its charter) Illinois 36-1924025 (State of incorporation) (I.R.S. Employer Identification No.) 200 Wilmot Road, Deerfield, Illinois 60015 (Address of principal executive offices) (Zip Code) (847) 940-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares issued and outstanding of the registrant's Common Stock, $.15625 par value, as of December 31, 1998 was 499,172,296. Page 1 of 11 WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The consolidated condensed financial statements included herein have been prepared by the company pursuant to the rules and regulations of the Securities and Exchange Commission. The Consolidated Condensed Balance Sheet as of November 30, 1998 and the Consolidated Condensed Statements of Earnings for the three months ended November 30, 1998 and 1997, have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the company's latest annual report on Form 10-K. In the opinion of the company the condensed statements for the unaudited interim periods presented include all adjustments, consisting only of normal recurring adjustments, necessary to present a fair statement of the results for such interim periods. Because of the influence of certain holidays, seasonal and other factors on the company's operations, net earnings for any interim period may not be comparable to the same interim period in previous years, nor necessarily indicative of earnings for the full year. 2 WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Millions) (Unaudited) November 30, August 31, 1998 1998 ASSETS Current Assets: Cash and cash equivalents $ 113 $ 144 Accounts receivable 435 373 Inventories 2,238 2,027 Other current assets 97 79 Total Current Assets 2,883 2,623 Property and Equipment, at cost, less accumulated depreciation and amortization of $864 at November 30 and $817 at August 31 2,222 2,144 Other Non-Current Assets 135 135 TOTAL ASSETS $ 5,240 $ 4,902 LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 100 $ - Trade accounts payable 1,050 907 Other current liabilities 641 673 Total Current Liabilities 1,791 1,580 Non-Current Liabilities: Deferred income taxes 90 89 Other non-current liabilities 417 384 Total Non-Current Liabilities 507 473 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 498,959,806 at November 30 and 498,243,522 at August 31 78 78 Paid-in capital 139 118 Retained Earnings 2,725 2,653 Total Shareholders' Equity 2,942 2,849 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 5,240 $ 4,902 The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 3 WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) (Dollars in Millions Except Per Share Data) Three Months Ended November 30, 1998 1997 Net sales $ 4,016 $ 3,485 Costs and Deductions: Cost of sales 2,942 2,541 Selling, occupancy and administration 904 801 3,846 3,342 Other (Income)Expense: Interest income (1) (1) Interest expense - 1 (1) - Earnings before income tax provision and cumulative effect of accounting change 171 143 Income tax provision 67 56 Earnings before cumulative effect of accounting change 104 87 Cumulative effect of accounting change for system development costs - (26) Net earnings $ 104 $ 61 Per Share- Basic: Earnings before cumulative effect of accounting change $ 0.21 $ 0.18 Cumulative effect of accounting change for system development costs - (0.05) Net earnings $ 0.21 $ 0.13 Diluted: Earnings before cumulative effect of accounting change $ 0.21 $ 0.18 Cumulative effect of accounting change for system development costs - (0.05) Net earnings $ 0.21 $ 0.13 Dividends declared $0.0650 $0.0625 Average shares outstanding 499 494 Dilutive effect of stock options 7 7 Average shares outstanding assuming dilution 506 501 The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 4 WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in Millions) Three Months Ended November 30, 1998 1997 Net cash provided by(used for) operating activities $ 11 $ (15) Cash Flows from Investing Activities: Additions to property and equipment (146) (148) Proceeds from the surrender of corporate- owned life insurance policies - 58 Other 2 5 Net cash used for investing activities (144) (85) Cash Flows from Financing Activities: Cash dividends paid (31) (30) Net proceeds from notes payable 100 35 Proceeds from employee stock plans 19 37 Other 14 (1) Net cash provided by financing activities 102 41 Changes in Cash and Cash Equivalents: Net decrease in cash and cash equivalents (31) (59) Cash and cash equivalents at beginning of year 144 73 Cash and Cash Equivalents at end of period $ 113 $ 14 The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 5 WALGREEN CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At November 30, 1998 and August 31, 1998, inventories would have been greater by $505 million and $491 million respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Cost of sales is primarily derived from an estimate based upon point-of-sale scanning and adjusted based on periodic inventories. (2) 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. (3) 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. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Earnings for the first quarter of fiscal 1999 were $104 million or $.21 per share. This was a 19.5% increase over last year's earnings before accounting change. The accounting change last year involved expensing the cumulative cost of business process reengineering activities that had been capitalized as part of system development projects. Including that $26 million after-tax charge ($.05 per share), net earnings increased 70.5%. Sales for the quarter ended November 30, 1998, increased by 15.2% to $4.0 billion. 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 10.4% for the quarter. New store openings accounted for 8.9% of the quarterly sales increase. The company operated 2,612 drugstores as of November 30, 1998, compared to 2,390 a year earlier. Prescription sales increased 22.8% for the first quarter and were 52.6% of total sales compared to 49.4% a year ago. Prescription sales in comparable stores increased 18.9%. 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 26.7% of sales from 27.1% last year. The two major factors contributing to the decrease were the decline in pharmacy gross profit margins and the interim 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 LIFO method of inventory valuation, which can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Cost of sales for the November quarter includes a LIFO provision of $14 million ($.02 per share) versus $6 million ($.01 per share) for the same period a year ago. Selling, occupancy and administration expenses were 22.5% of sales in the quarter compared to 23.0% a year ago. The decrease, as a percent to sales, was caused by lower payroll, advertising, and headquarters expenses. The effective tax rates were 38.75% in both periods. 7 FINANCIAL CONDITION Cash and cash equivalents were $113 million at November 30, 1998, compared to $14 million at November 30, 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 the first quarter was $11 million compared to $15 million used for operating activities a year ago. The change between periods was principally due to better inventory control. 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 $144 million versus $85 million last year. Additions to property and equipment were $146 million compared to $148 million last year. There were 80 new or relocated drugstores opened during the first quarter of this year. This compares to 58 in the same period last year. There were 51 owned locations opened during the quarter or under construction at November 30, 1998 versus 46 for the same period last year. During the first quarter of last fiscal year, the company surrendered corporate-owned life insurance policies resulting in net proceeds of $58 million. 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 $102 million compared to $41 million a year ago. During both quarters, the company obtained funds through the placement of short-term notes payable. At November 30, 1998, the company had $140 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 November 30, 1998, it is estimated that 80% 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 potential adverse effects on the company of 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. 8 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. Cautionary Note Regarding Forward-looking Statements Certain information in this Form 10-Q, as well as in other public filings, press releases and oral statements made by our representatives, is forward-looking information based on current expectations and plans that involve risks and uncertainties. Forward-looking information includes statements concerning pharmacy sales trends, prescription margins, number of new store openings, the level of capital expenditures and the company's success in addressing Year 2000 issues; as well as those that include or are preceded by the words "expects,""estimates,""believes" or similar language. For such statements, we claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following factors, in addition to those discussed elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended August 31, 1998, could cause results to differ materially from management expectations as projected in such forward-looking statements: changes in economic conditions generally or in the markets served by the company; consumer preferences and spending patterns; competition from other drugstore chains, supermarkets, other retailers and mail order companies; changes in state or federal legislation or regulations; the efforts of third party payers to reduce prescription drug costs; the success of planned advertising and merchandising strategies; the availability and cost of real estate and construction; accounting policies and practices; the company's ability to hire and retain pharmacists and other store and management personnel; the company's relationships with its suppliers; the ability of the company, its vendors and others to manage Year 2000 issues; the company's ability to successfully implement new computer systems and technology; and adverse determinations with respect to litigation or other claims. The company assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances. 9 PART II. OTHER INFORMATION Item. 6 Exhibits and Reports on Form 8-K (a) Exhibits filed with this report: 27. Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the quarter ending November 30, 1998. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WALGREEN CO. (Registrant) Dated January 12, 1999 /s/R.L. Polark R.L. Polark Senior Vice President (Chief Financial Officer) Dated January 12, 1999 /s/W.M. Rudolphsen W.M. Rudolphsen Controller (Chief Accounting Officer) 11 INDEX TO EXHIBITS DOCUMENT FILED WITH THIS REPORT Exhibit 27 Financial Data Schedule EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM THE FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS AUG-31-1999 SEP-01-1998 NOV-30-1998 113 0 454 19 2,238 2,883 2,222 864 5,240 1,791 28 0 0 217 2,725 5,240 4,016 4,016 2,942 2,942 904 8 0 171 67 104 0 0 0 104 0.21 0.21
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