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Walgreen Company 10-K 2008 Documents found in this filing:
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
For
the fiscal year ended August 31, 2008.
For the
Transition Period From ____________ to ___________
Commission
file number1-604.
Registrant's
telephone number, including area code: (847)
914-2500
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
xNo o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes oNo x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (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 xNo o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "large accelerated filer”, and
“accelerated filer" and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer x Accelerated
filer o
Non-accelerated
filer o Smaller
Reporting Company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes oNo x
As of
February 29, 2008, the aggregate market value of Walgreen Co. common stock, par
value $.078125 per share, held by non-affiliates (based upon the closing
transaction price on the New York Stock Exchange) was approximately
$36,161,583,000. As of September 30, 2008, there were 989,364,303
shares of Walgreen Co. common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Annual Report to Shareholders for the year ended August 31, 2008, to the
extent stated in this Form 10-K, are incorporated by reference into Parts I, II
and IV of this Form 10-K. Portions of the registrant's proxy
statement for its 2008 annual meeting of shareholders to be held January 14,
2009, are incorporated by reference into Part III of this Form 10-K.
TABLE OF
CONTENTS
PART
I
Walgreen
Co. (The "company" or "Walgreens") was incorporated as an Illinois corporation
in 1909 as a successor to a business founded in 1901. In 2008 the
company opened or acquired 1,031 locations for a net increase of 937 locations
after relocations and closings. As of August 31, 2008, we operated
6,934 locations in 49 states, the District of Columbia, Puerto Rico and
Guam. Total locations do not include 217 convenient care clinics
operated by Take Care Health Systems, Inc.
Retail
organic growth continues to be our primary growth vehicle, but we carefully
consider unique acquisition opportunities when they are a good fit with the
existing store base. In 2008, for example, we acquired I-trax, Inc.
and Whole Health Management, operators of worksite health services, including
primary and acute care, wellness, pharmacy and disease management services and
health and fitness programming.
Walgreens
corporate strategy is to continue to leverage and enhance its fundamental
competitive advantage – the best, most convenient, community-based store network
in America. The company intends to focus on its core business – providing the
most convenient access to consumer goods and services for customers and
pharmacy, health and wellness for patients, employers and payors in communities
where people live and work across America.
Prescription
sales continue to be a large portion of the company's business. This
year prescriptions accounted for 64.9% of sales compared to 65.0% last
year. Third party sales, where reimbursement is received from managed
care organizations, government and private insurance, were 95.3% of prescription
sales compared to 94.8% a year ago. Overall, Walgreens filled
approximately 617 million prescriptions in 2008, an increase of 5.7% from the
previous year.
Walgreens
pharmacy sales are expected to continue to grow due, in part, to the aging
population and the continued development of innovative drugs that improve
quality of life and control health care costs. Also, generic
introductions continue to boost the number of prescriptions
filled. Although generics reduce sales dollars, they save both
patients and payors money and generally offer higher gross profit than brand
name drugs.
During
fiscal 2008, Walgreens' market share in 58 of the top 60 front-end categories
increased, as compared to all food, drug and mass merchandise
competitors. Today, 147 million people live within
two miles of a Walgreens and 5.3 million shoppers walk into a
Walgreens store daily.
During
fiscal year 2008 the company added $2.2 billion to property and
equipment, which included approximately $1.9 billion related to stores, $166
million for distribution centers, and $147 million related to other
locations. Capital expenditures for fiscal 2009 are expected to be
approximately $1.8 billion, excluding
acquisitions and prescription file purchases.
In fiscal
2007, the company opened a distribution center in Anderson, South
Carolina. This is the first of a new-generation of distribution
centers and will increase the company’s productivity. A second
new-generation center in Windsor, Connecticut is planned to open in fiscal
2009.
The
company is principally in the retail drugstore business and its operations are
within one reportable segment.
The
company’s drugstores are engaged in the retail sale of prescription and
non-prescription drugs and general merchandise. General merchandise
includes, among other things, beauty care, personal care, household items,
candy, photofinishing, greeting cards, convenience foods, and seasonal
items. Customers can have prescriptions filled at the drugstore
counter, as well as through the mail, by telephone and via the
Internet.
The
estimated contributions of various product classes to sales for each of the last
three fiscal years are as follows:
Not
applicable.
1
Inventories
are purchased from numerous domestic and foreign suppliers. The loss
of any one supplier or group of suppliers under common control would not have a
material effect on the company’s business.
Walgreens
markets products under various trademarks, trade dress and trade names and holds
assorted business licenses (such as pharmacy, occupational, and liquor) having
various lives, which are necessary for the normal operation of
business. The company also has filed various patent applications
relating to its business and products, eight of which have been
issued.
The
business is seasonal in nature, with Christmas generating a higher proportion of
front-end sales and earnings than other periods. Both prescription
and non-prescription drug sales are affected by the timing and severity of the
cold/flu season. See the caption "Summary of Quarterly Results
(Unaudited)" on page 35 of the Annual Report to Shareholders for the year ended
August 31, 2008 ("2008 Annual Report"), which section is incorporated herein by
reference.
The
company generally finances its inventory and expansion needs with internally
generated funds. In fiscal 2008 we supplemented cash provided by
operations with short-term borrowings and long-term debt. See Note 6,
"Short-Term Borrowings and Long-Term Debt" on page 31 and "Management's
Discussion and Analysis of Financial Condition" on pages 18 through 22 of the
2008 Annual Report, which sections are incorporated herein by
reference.
Due to
the nature of our business, 95.3% of all prescription sales are now covered by
third party payors. Prescription sales represent 64.9% of total
company sales. The remaining store sales are principally for cash,
credit and debit cards. Customer returns are immaterial.
The
company sells to numerous customers including various managed care
organizations; therefore, the loss of any one customer or a group of customers
under common control would not have a material effect on the
business. No customer accounts for ten percent or more of the
company's consolidated net sales.
(viii) Backlog
orders.
Not
applicable.
The
company fills prescriptions for many state public assistance plans. Revenues
from all such plans are approximately 5.4% of total sales.
The
drugstore industry is highly competitive. As a volume leader in the
retail drug industry, Walgreens competes with various retailers, including chain
and independent drugstores, mail order prescription providers, grocery stores,
convenient stores, mass merchants and dollar stores. Competition
remained keen during the fiscal year with the company competing on the basis of
service, convenience, variety and price. The company's geographic
dispersion tends to offset the impact of temporary economic and competitive
conditions in individual markets. The number and location of the
company's drugstores appears under Item 2 - "Properties" in this Form
10-K.
The
company does not engage in any material research and development
activities.
Federal,
state and local environmental protection requirements have no material effect
upon capital expenditures, earnings or the competitive position of the
company.
The
company employs approximately 237,000 persons, about 74,000 of whom are
part-time employees working less than 30 hours per week.
All the
company sales occurred within the United States and Puerto
Rico. There are no export sales.
2
The
company maintains a website at investor.walgreens.com. The company
makes copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to those reports filed with or
furnished to the SEC available to investors on or through its website free of
charge as soon as reasonably practicable after the company electronically files
them with or furnishes them to the SEC. The contents of the company's
website are not, however, a part of this report. In addition,
charters of all committees of the company's Board of Directors, as well as the
company's Corporate Governance Guidelines and Ethics Policy Statement, are
available on the company's website at investor.walgreens.com or, upon written
request, in printed hardcopy form. Written requests should be sent to
Walgreen Co., Attention: Shareholder Relations, Mail Stop #2261, 200 Wilmot
Road, Deerfield, Illinois 60015. Changes to or waivers, if any, of
the company's Ethics Policy Statement for directors and executive officers would
be promptly disclosed on the company's website.
The
company has also adopted a Code of Ethics for Financial
Executives. This Code applies to and has been signed by the Chief
Executive Officer, the Chief Financial Officer and the
Controller. The full text of the Code of Ethics for Financial
Executives is available at the company's website,
investor.walgreens.com. Changes to or waivers, if any, of the
company's Code of Ethics for Financial Executives would be promptly disclosed on
the company's website.
Cautionary
Note Regarding Forward Looking Statements
Certain
information in this annual report, as well as in our other public filings, the
company website, press releases and oral statements made by our representatives,
is forward-looking information based on the company’s current expectations and
plans, which involve risks and uncertainties. Forward-looking
information includes statements concerning pharmacy sales trends, prescription
margins, number and location of new store openings, outcomes of litigation, the
level of capital expenditures, demographic trends. Forward-looking
information also includes statements with words such as "expects," "estimates,"
"believes," "plans," "anticipates" or similar language. For such statements, we
claim the protection of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Forward-looking
statements involve risks and uncertainties, known or unknown to the company that
could cause results to differ materially from management expectations as
projected in such forward-looking statements. These risks and
uncertainties are discussed in Item 1A below. Unless otherwise
required by applicable securities laws, the company assumes no obligation to
update its forward-looking statements to reflect subsequent events or
circumstances.
Item
1A. Risk
Factors
The risks
described below could materially and adversely affect our business, financial
condition and results of operations. These risks are not the only risks that we
face. Our business operations could also be affected by additional factors that
are not presently known to us or that we currently consider to be immaterial to
our operations.
The
retail drugstore and pharmacy benefit services industries are highly competitive
and further increases in competition could adversely affect us.
We face
intense competition with local, regional and national companies, including other
drug store chains, independent drug stores, mail-order prescription providers
and various other retailers such as grocery stores, convenience stores, mass
merchants and dollar stores, many of which are aggressively expanding in markets
we serve. In the pharmacy benefit services industry, our competitors
include large national and regional pharmacy benefit managers and insurance
companies and managed care providers, some of which are owned by or have
affiliations with our retail drug store competitors. As competition
increases in the markets in which we operate, a significant increase in general
pricing pressures could occur, which could require us to reevaluate our pricing
structures to remain competitive. Our failure to reduce prices could
result in decreased revenue, and reducing prices without also reducing costs
could negatively affect profits.
Reductions
in third-party reimbursement levels, from private or government plans, for
prescription drugs could reduce our margin on pharmacy sales and could have a
significant effect on our retail drugstore profits.
The
continued efforts of health maintenance organizations, managed care
organizations, pharmacy benefit management companies, government entities, and
other third-party payors to reduce prescription drug costs and pharmacy
reimbursement rates, as well as litigation relating to how brand name drugs are
priced, may impact our profitability. In addition, some of these
entities may offer pricing terms that we may not be willing to accept or
otherwise restrict our participation in their networks of pharmacy providers.
Certain provisions of the Deficit Reduction Act of 2005 seek to reduce federal
spending by altering the Medicaid reimbursement formula for multi-source (i.e.,
generic) drugs. These changes are expected to result in reduced
Medicaid reimbursement rates for retail pharmacies. Reduced
reimbursement rates could adversely affect our revenues and
profits.
We
are subject to governmental regulations and procedures and other legal
requirements. A significant change in, or noncompliance with, these regulations,
procedures and requirements could have a material adverse effect on
profitability.
Our
retail drugstore, pharmacy benefit and health services businesses are subject to
numerous federal, state and local regulations. Changes in these regulations may
require extensive system and operating changes that may be difficult to
implement. Untimely compliance or noncompliance with applicable regulations
could result in the imposition of civil and criminal penalties that could
adversely affect the continued operation of our business, including: suspension
of payments from government programs; loss of required government
certifications; loss of authorizations to participate in or exclusion from
government reimbursement programs, such as the Medicare and Medicaid programs;
loss of licenses; or significant fines or monetary penalties, and could
adversely affect the continued operation of our business. The regulations to which
we are subject include, but are not limited to: federal, state and local
registration and regulation of pharmacies; applicable Medicare and Medicaid
regulations; the Health Insurance Portability and Accountability Act, or HIPAA;
accounting standards; tax laws and regulations; laws and regulations relating to
the protection of the environment and health and safety matters, including those
governing exposure to, and the management and disposal of, hazardous substances;
regulations of the U.S. Food and Drug Administration, the U.S. Federal Trade
Commission, the Drug Enforcement Administration, and the Consumer Product Safety
Commission, as well as state regulatory authorities, governing the sale,
advertisement and promotion of products we sell; anti-kickback laws; false
claims laws; laws against the corporate practice of medicine; and federal and
state laws governing the practice of the profession of pharmacy. In addition, we
are party to a Corporate Integrity Agreement with the U.S. Department of Health
and Human Services under which we have agreed to maintain a corporate compliance
program. We are also governed by federal and state laws of general
applicability, including laws regulating matters of working conditions, health
and safety and equal employment opportunity. In addition, we could
have exposure if we are found to have infringed another party's intellectual
property rights.
3
Our
ability to hire and retain pharmacy personnel is important to the continued
success of our business.
As our
business expands, we believe that our future success will depend greatly on our
continued ability to attract and retain skilled and qualified pharmacists. The
retail drugstore industry is experiencing an ongoing shortage of licensed
pharmacists. This has resulted in continued upward pressure on pharmacist
compensation packages. Although we generally have been able to meet our
pharmacist staffing requirements in the past, any future inability to do so
could limit our ability to offer extended pharmacy hours and negatively impact
our revenue and our ability to deliver high levels of customer
service.
Should
a product liability issue, recall or personal injury issue arise, inadequate
product or other liability insurance coverage or our inability to maintain such
insurance may result in a material adverse effect on our business and financial
condition.
Products
that we sell could become subject to contamination, product tampering,
mislabeling, recall or other damage. In addition, errors in the dispensing and
packaging of pharmaceuticals could lead to serious injury. Product liability or
personal injury claims may be asserted against us with respect to any of the
products or pharmaceuticals we sell or services we provide. Our health and
wellness business also involves exposure to professional liability claims
related to medical care. Should a product or other liability issue
arise, the coverage limits under our insurance programs and the indemnification
amounts available to us may not be adequate to protect us against claims. We
also may not be able to maintain this insurance on acceptable terms in the
future. Damage to our reputation in the event of a product liability or personal
injury issue or judgment against us or a product recall could have an adverse
effect on our business, financial condition or results of
operations.
Our
ability to grow our business may be constrained by our inability to find
suitable new store locations at acceptable prices or by the expiration of our
current leases.
Our
ability to grow our business may be constrained if suitable new store locations
cannot be identified with lease terms or purchase prices that are acceptable to
us. We compete with other retailers and businesses for suitable locations for
our stores. Local land use and other regulations applicable to the types of
stores we desire to construct may impact our ability to find suitable locations
and influence the cost of constructing our stores. The expiration of leases at
existing store locations may adversely affect us if the renewal terms of those
leases are unacceptable to us and we are forced to close or relocate stores.
Further, changing local demographics at existing store locations may adversely
affect revenue and profitability levels at those stores.
Changes
in economic conditions could adversely affect consumer buying practices and
reduce our revenues and profitability.
Our
performance may be negatively influenced by changes in national, regional or
local economic conditions and consumer confidence. External factors that affect
consumer confidence and over which we exercise no influence include unemployment
rates, levels of personal disposable income, national, regional or local
economic conditions, the introduction of new merchandise or brand and generic
prescription drugs, and acts of war or terrorism. Changes in economic conditions
and consumer confidence could adversely affect consumer preferences, purchasing
power and spending patterns. A decrease in overall consumer spending as a result
of changes in economic conditions could adversely affect our front-end and
pharmacy sales. Profit margins are greater on front-end sales than on pharmacy
sales, and any decrease in sales of front-end products would have a negative
impact on our profitability. All these factors could impact our revenues,
operating results and financial condition.
Our
profitability can be adversely affected by a decrease in the introduction of new
brand name and generic prescription drugs.
Our sales
and profit margins are affected by the introduction of new brand name and
generic drugs. New brand name drugs can result in increased drug
utilization and associated sales revenues, while the introduction of lower
priced generic alternatives typically result in higher gross profit
margins. Accordingly, a decrease in the number of significant new
drugs or generics successfully introduced could adversely affect our results of
operations.
If
we fail to offer the merchandise and services that our customers want, our sales
may be affected.
Our
success depends on our ability to offer a superior shopping experience, a
quality assortment of available merchandise and superior customer service. We
must identify, obtain supplies of, and offer to our customers, attractive,
innovative and high-quality merchandise on a continuous basis. Our products and
services must satisfy the desires of our customers, whose preferences may change
in the future. If we misjudge either the demand for products and
services we sell or our customers’ purchasing habits and tastes, we may be faced
with excess inventories of some products and missed opportunities for products
and services we chose not to offer. In addition, our sales may
decline or we may be required to sell the merchandise we have obtained at lower
prices. This would have a negative effect on our business and results of
operations.
We
have made and expect to continue to make acquisitions that could disrupt our
operations and harm our operating results.
We have
grown our business through acquisitions in recent years and expect to continue
to acquire drugstore chains, independent drugstores and related businesses in
the future. Acquisitions involve numerous risks, including difficulties in
integrating the operations and personnel of the acquired companies, distraction
of management from overseeing our existing operations, difficulties in entering
markets in which we have no or limited direct prior experience, and difficulties
in achieving the synergies we anticipated. Acquisitions may also cause us to
significantly increase our interest expense, leverage and debt service
requirements if we incur additional debt to pay for an acquisition, issue common
stock that would dilute our current shareholders’ percentage ownership, or incur
write-offs and restructuring and other related expenses. No assurance
can be given that our acquisitions will be successful and will not materially
adversely affect our results of operations.
Our
credit ratings are important to our cost of capital and lease terms for our
stores.
The major
credit rating agencies have given us and our corporate debt investment grade
credit ratings. These ratings are based on a number of factors, which include
our financial strength and financial policies. We aim to maintain our high
ratings as they serve to lower our borrowing costs and facilitate our access to
a variety of lenders and other creditors, including landlords for our leased
stores, on terms that we consider advantageous to our
business. Failure to maintain our credit ratings could adversely
affect our cost of funds, liquidity, competitive position and access to capital
markets.
4
There
are a number of additional business risks which could adversely affect our
financial results.
Our
success depends on our ability to establish effective advertising, marketing and
promotional programs. If we are unsuccessful in our advertising, merchandising
or promotional strategies, sales or sales margins could be negatively affected.
Our success also depends on our continued ability to attract and retain store
and management personnel, and the loss of key personnel could have an adverse
effect on the results of our operations, financial condition or cash flow. We
also may not be able to successfully and timely implement new computer systems
and technology or business processes, or may experience disruptions or delays to
the computer systems we depend on to manage our ordering, pricing,
point-of-sale, inventory replenishment and other processes, which could
adversely impact our operations and our ability to attract and retain customers.
Severe weather conditions, terrorist activities, health epidemics or pandemics
or the prospect of these events can impact our store operations or damage our
facilities in affected areas or have an adverse impact on consumer confidence
levels and spending in our stores. Furthermore, the products we sell are sourced
from a wide variety of domestic and international vendors, and any future
inability to find qualified vendors and access products in a timely and
efficient manner could adversely impact our business.
Item
1B. Unresolved Staff
Comments
There are
no unresolved staff comments outstanding with the Securities and Exchange
Commission at this time.
The
company's locations by state for fiscal 2008 and 2007 are listed
below.
Most of
the company's stores are leased. The leases are for various terms and
periods. See Note 2, "Leases" on page 29 of the 2008 Annual Report,
which section is incorporated herein by reference. The company owns
approximately 19.9% of the
retail stores open at August 31, 2008. The company has a moderate
expansion program of adding new stores and remodeling and
relocating existing stores. Net retail selling space was increased
from 66 million square feet at August 31, 2007, to 73 million square feet at
August 31, 2008. Approximately 38.5% of company stores have
been opened or remodeled during the past five years.
The
company's retail store operations are supported by thirteen major distribution
centers with a total of approximately 11 million square feet of space in all
distribution centers, of which 7 million square feet is owned. The
remaining space is leased. All distribution centers are served by
modern systems for order processing control, operating efficiencies and rapid
merchandise delivery to stores. In addition, the company uses public
warehouses to handle certain distribution needs. A new distribution
center in Anderson, South Carolina opened in fiscal 2007. A new
distribution center is scheduled to open in Windsor, Connecticut in fiscal
2009.
There are
31 principal office facilities containing approximately 3 million square feet of
which approximately 2 million square feet is owned and the remainder is
leased. The company operates two mail service facilities containing
approximately 237 thousand square feet of which approximately 133 thousand
square feet is owned and the remainder is leased.
The
company also owns 28 strip shopping malls containing approximately 1 million
square feet of which approximately 683 thousand square feet is leased to
others.
The
information in response to this item is incorporated herein by reference to Note
7 "Contingencies" on page 31 of the 2008 Annual Report.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year. 5
Item
4.1 Executive Officers of the
Registrant
The
following information is furnished with respect to each executive officer of the
company as of October 15, 2008:
6
OFFICERS OF THE REGISTRANT –
continued:
7
OFFICERS OF THE REGISTRANT -
continued:
Kevin P.
Walgreen is the son of Charles R. Walgreen III, who is a director of the
company.
8
PART
II
The
company's common stock is listed on the New York Stock Exchange, Chicago Stock
Exchange and The Nasdaq Stock Market LLC under the symbol WAG. As of
September 30, 2008 there were approximately 97,000 recordholders of company
common stock.
The range
of the sales prices of the company's common stock by quarters during the years
ended August 31, 2008 and August 31, 2007 are incorporated herein by reference
to the caption "Common Stock Prices" on page 35 of the 2008 Annual
Report.
The
company's cash dividends per common share during the two fiscal years ended
August 31 are as follows:
The
following table provides information about purchases by the company during the
quarter ended August 31, 2008 of equity securities that are registered by the
company pursuant to Section 12 of the Exchange Act:
Item
6. Selected Financial
Data
The
information in response to this item is incorporated herein by reference to the
caption "Five-Year Summary of Selected Consolidated Financial Data" on page 17
of the 2008 Annual Report.
The
information in response to this item is incorporated herein by reference to the
caption "Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 18 through 22 of the 2008 Annual
Report.
Item
7A. Qualitative and Quantitative
Disclosures about Market Risk
Management
does not believe that there is any material market risk exposure with respect to
derivative or other financial instruments that would require disclosure under
this item.
See Item
15.
None.
9
Based on
their evaluation as of August 31, 2008 pursuant to Exchange Act Rule 13a-15(b),
the company's management, including its Chief Executive Officer and Chief
Financial Officer, believe the company's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) are effective.
Management's
report on internal control and the attestation report of Deloitte & Touche
LLP, the company's independent registered public accounting firm, are included
in our Annual Report to Shareholders for the year ended August 31, 2008 and are
incorporated in this Item 9A by reference. Our 2008 Annual Report to
Shareholders is included as an Exhibit to this Annual Report on Form
10-K.
In
connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the
company's internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) by the company's management, including its Chief Executive
Officer and Chief Financial Officer, no changes during the quarter ended August
31, 2007 were identified that have materially affected, or are reasonably likely
to materially affect, the company's internal control over financial
reporting.
On
October 8, 2008, the company’s Board of Directors amended and restated the
Walgreen Co. Management Incentive Plan effective as of September 1,
2008. Among other things, the amendment provides greater discretion
to the Compensation Committee: (1) to select bonus performance metrics each
year; (2) to set bonus targets each year and to vary those targets (and the
variability around those targets) for different levels of employees; and (3) to
adjust bonuses up or down based on individual performance. The
amended and restated Walgreen Co. Management Incentive Plan is filed as Exhibit
10.3 to this Form 10-K.
PART
III
The
information required by Item 10, with the exception of the information relating
to the executive officers of the company, which is presented in Item I above
under the heading "Executive Officers of the Registrant," is incorporated herein
by reference to the following sections of the company's 2008 Proxy
Statement: Proposal 1, Election Of Directors; Information Concerning
Corporate Governance, the Board of Directors and its Committees; and Section
16(a) Beneficial Ownership Reporting Compliance.
The
information required by Item 11 is incorporated herein by reference to the
following sections of the company's 2008 Proxy Statement: Compensation of
Directors; and Executive Compensation – Compensation Disclosure and
Analysis.
The
information required by Item 12 is incorporated herein by reference to the
following sections of the company's 2008 Proxy Statement: Security Ownership of
Certain Beneficial Owners; and Management and Equity Plan
Information.
The
information required by Item 13 is incorporated herein by reference to the
following sections of the company's 2008 Proxy Statement: Certain Relationships
and Related Party Transactions; and Information Concerning Corporate
Governance.
Fees
Paid to the Independent Registered Public Accounting Firm
All fees billed by Deloitte &
Touche LLP for services rendered during fiscal years 2008 and 2007 are as
follows:
10
Pre-Approval
of Services Provided By the Independent Registered Public Accounting
Firm
The Audit
Committee is responsible for appointing, setting compensation for and overseeing
the work of the Company’s independent registered public accounting firm, and has
established a policy concerning the preapproval of services performed by the
Company’s independent registered public accounting firm. Each
proposed engagement not specifically identified by the SEC as impairing
independence is evaluated for independence implications prior to entering into a
contract with the independent registered public accounting firm for such
services. The Audit Committee has approved in advance certain
permitted services whose scope is consistent with auditor
independence. These services are (i) statutory audits of Company
subsidiaries, (ii) services associated with SEC registration statements, other
documents filed with the SEC or other documents issued in connection with
securities offerings (for example, comfort letters or consents), (iii)
consultations related to adoption of new accounting or auditing pronouncements,
disclosure requirements or other accounting related regulations, and (iv) audits
of employee benefit plans. If the project is in a permitted category,
it is considered pre-approved by the Audit Committee. All other services require
specific pre-approval by the Audit Committee. Engagements with total fees less
than $100,000 require the approval of one member of the Audit Committee.
Engagements with total fees greater than $100,000 require the approval of the
full Audit Committee. On a quarterly basis, the Audit Committee reviews a
summary listing all service fees, along with a reasonably detailed description
of the nature of the engagement.
All
audit, audit-related, and tax services performed by Deloitte in fiscal year 2008
were pre-approved by the Audit Committee in accordance with the regulations of
the SEC. The Audit Committee considered and determined that the
provision of nonaudit services by Deloitte during fiscal year 2008 was
compatible with maintaining auditor independence.
Review
of Deloitte’s Independence
On
September 22, 2008, Deloitte advised us that it had recently become aware of
unauthorized personal securities transactions in the Company’s securities by a
Deloitte partner who served as the advisory partner on Deloitte’s audit team for
the Company until his resignation from Deloitte in September 2008 (the “Former
Advisory Partner”). Deloitte believes that the Former Advisory
Partner engaged in trading in the Company’s common stock, or options relating
thereto, as well as common stock, or options relating thereto, issued by Option
Care, Inc., which was acquired by the Company in 2007. The Company’s
Deloitte audit engagement team consisted of an Audit Partner, a Concurring
Partner, the Former Advisory Partner, a Senior Manager and additional Deloitte
professional staff. The Audit Partner had responsibility for all
substantive issues with respect to the planning, scope and conduct of the
Company’s audit, while the Former Advisory Partner was responsible for client
relationship management and service assessment. Pursuant to the SEC’s
rules, and to Deloitte’s own rules, on auditor independence, the Former Advisory
Partner was not permitted to own or trade in the Company’s
securities.
Deloitte
has informed the Company that Deloitte’s investigation of the facts and
circumstances related to the Former Advisory Partner determined that,
notwithstanding the violation of the SEC’s independence rules, Deloitte’s
objectivity and integrity with respect to the Company’s audits was unaffected
such that Deloitte’s independence with respect to the audits remained unimpaired
and that, in Deloitte’s opinion, it remains independent. Accordingly,
in the written disclosures and the letter from Deloitte & Touche LLP
required by Independence Standards Board Standard No. 1 and
the rules of the Public Company Accounting Oversight Board (PCAOB), Deloitte
stated that the behavior of the Former Advisory Partner had not impaired
Deloitte’s independence with respect to the Company and that Deloitte remained
independent accountants with respect to the Company, within the meaning of the
Securities Act and the Securities Exchange Act and the requirements of the
PCAOB. In discussions with the Audit Committee, Deloitte stated that
its conclusion was based on, among other things, the results of its internal
investigation, which concluded that (i) the Audit Partner, rather than the
Former Advisory Partner, was responsible for the planning, scope and conduct of
the Company’s audits, including setting materiality levels and determining audit
procedures, (ii) while the Former Advisory Partner did review the audit plan
document and offer high-level editorial comments, he did not offer any
substantive changes, (iii) the Former Advisory Partner did not prepare or review
work papers with respect to the Company’s audits, (iv) although he was made
aware of certain technical issues, the Former Advisory Partner was not consulted
on any technical accounting, auditing or independence issues related to the
Company’s audits by the Audit Partner, the Concurring Partner or any other
members of the audit engagement team, and (v) no Deloitte personnel, including
the audit engagement team, had any knowledge of the Former Advisory Partner’s
trading activities.
Following
Deloitte’s disclosure, the Company and the Audit Committee engaged counsel to
independently investigate the facts relating to the Former Advisory
Partner. In the course of the investigation, counsel interviewed
relevant Deloitte personnel and the members of the Company’s executive team who
had regular contact with the Former Advisory Partner. Counsel
informed the Audit Committee that its investigation had confirmed that (i) none
of the Company executives interviewed by counsel could recall the Former
Advisory Partner participating in any steps of the actual audit process or in
any discussions regarding accounting treatment of any items appearing on the
Company’s financial statements, (ii) while the Former Advisory Partner regularly
attended Audit Committee meetings, neither management nor the Audit Committee
looked to the Former Advisory Partner for input on substantive issues relating
directly to the Company at those meetings, (iii) the Deloitte Audit Partner
always led the discussions relating to all aspects of the audit at Audit
Committee meetings, while the Former Advisory Partner’s role at Audit Committee
meetings was limited to comments on the qualifications and firm-wide legal risk
exposure of Deloitte, any PCAOB reviews of Deloitte, non-audit services that
Deloitte might be able to offer the Company, client satisfaction issues, and
global best practices for audit committees, and (iv) none of the interviewed
Company employees had any indication that the Former Advisory Partner had
engaged in securities trading activities that may have violated the independence
rules of the SEC, or of Deloitte, prior to September 22,
2008. Furthermore, in the course of an Audit Committee meeting the
Audit Committee Chairman confirmed with each of the members of the Audit
Committee, as well as with the Company’s Chief Executive Officer and Chief
Operating Officer, that their experiences with the Former Advisory Partner were
consistent with the foregoing.
Based on
the report by Deloitte and the results of the independent investigation by
counsel, the Audit Committee concluded that, notwithstanding the actions of the
Former Advisory Partner resulting in the violation of the SEC’s auditor
independence rule, Deloitte’s independence with respect to the Company was not
impaired. Following this determination, the Audit Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company’s Annual Report on Form 10-K for the year ended August 31,
2008. After a review of the quality of Deloitte’s audit work, the
professional abilities and experience of the Deloitte staff assigned to the
audit and Deloitte’s internal controls designed to provide reasonable assurance
of independence, the Audit Committee appointed Deloitte & Touche LLP as the
Company’s independent registered public accounting firm for the fiscal year
ending August 31, 2009.
The
Company and Deloitte subsequently discussed their conclusions regarding the
Former Advisory Partner with, and on October 20, 2008 the Company furnished a
detailed written analysis to, the staff of the SEC.
11
PART
IV
Schedules
I, III, IV and V are not submitted because they are not applicable or not
required or because the required information is included in the Financial
Statements in (1) above or notes thereto.
Other
Financial Statements -
Separate
financial statements of the registrant have been omitted because it is primarily
an operating company, and all of its subsidiaries are included in the
consolidated financial statements.
12
13
14
15
WALGREEN CO. AND
SUBSIDIARIES
SCHEDULE II--VALUATION AND
QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST
31, 2008, 2007 AND 2006
(Dollars
in Millions)
16
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Walgreen Co.:
We have
audited the consolidated financial statements of Walgreen Co. and Subsidiaries
(the "Company") as of August 31, 2008 and 2007, and for each of the three years
in the period ended August 31, 2008, and the Company's internal control over
financial reporting as of August 31, 2008, and have issued our report thereon
dated October 28, 2008 (which report expresses an unqualified opinion and
includes an explanatory paragraph related to the adoption of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109, and Statement of
Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)); such consolidated financial statements and
report are included in your 2008 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of the Company listed in Item
15. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
October
28, 2008 SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934 this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
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