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Walgreen Company 10-Q 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
FOR
THE QUARTER ENDED NOVEMBER 30, 2008
OR
For the
transition period from _______to _______
Commission
File Number
1-604
 WALGREEN
CO.
(Exact
name of registrant as specified in its charter)
(847)
914-2500
(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.
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 definitions of "large accelerated filer”, “accelerated
filer" and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
number of shares outstanding of the registrant's Common Stock, $.078125 par
value, as of November 30, 2008 was 986,744,871. WALGREEN
CO.
FORM
10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2008
TABLE OF
CONTENTS
PART
I. FINANCIAL
INFORMATION
PART
II. OTHER
INFORMATION
PART
1. FINANCIAL INFORMATION
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 Sheets as of
November 30, 2008, August 31, 2008 and November 30, 2007, the Consolidated
Condensed Statements of Earnings for the three months ended November 30, 2008
and 2007, and the Consolidated Condensed Statements of Cash Flows for the three
months ended November 30, 2008 and 2007, have been prepared without
audit. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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 consolidated condensed statements for the unaudited
interim periods presented include all adjustments, consisting 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 or necessarily indicative of earnings for the full year.
The
accompanying Notes to Consolidated Condensed Financial
Statements
are an integral part of these Statements.
The
accompanying Notes to Consolidated Condensed Financial
Statements
are an integral part of these Statements.
The
accompanying Notes to Consolidated Condensed Financial
Statements
are an integral part of these Statements.
WALGREEN
CO. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) The
consolidated condensed financial statements include the accounts of the company
and its subsidiaries. All intercompany transactions have been
eliminated. The consolidated condensed financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America and include amounts based on management’s prudent
judgments and estimates. Actual results may differ from these
estimates. For a complete discussion of all our significant
accounting policies please see our 2008 annual report on Form 10-K.
The
November 30, 2007 balance sheet reflects the reclassification of debt, which was
previously condensed within the accrued expenses and other liabilities line and
other non-current liabilities line. In addition, software development
costs were reclassified from other non-current assets to property and
equipment.
(2)
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market
basis. At November 30, 2008, August 31, 2008 and November 30, 2007,
inventories would have been greater by $1,110 million, $1,067 million and $996
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.
Inventory includes product cost, inbound freight, warehousing costs and vendor
allowances not included as a reduction of advertising expense.
(3) The
principal retirement plan for employees is the Walgreen Profit-Sharing
Retirement Trust to which both the company and participating 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; however, beginning January 1, 2008, a portion of that contribution will
be in the form of a guaranteed match. The profit-sharing provision
was $58 million for the first quarter compared to $65 million last
year. The company made no cash or other contributions during the
first quarter of fiscal 2009 or 2008.
(4) The
company granted 16 million and 4 million stock options under the Walgreen Co.
Executive Stock Option Plan and the Walgreen Co. Stock Purchase/Option Plan
(Share Walgreens) for the quarters ended November 30, 2008 and 2007,
respectively. Total stock-based compensation expense was $32 million for the
quarter ended November 30, 2008 compared to $31 million last year. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R),
compensation expense is recognized on a straight-line basis over the employee's
vesting period or to the employee's retirement eligible date, if
earlier. For the quarters ended November 30, 2008 and 2007, the
company fully recognized retiree eligible expense of $14 million and $16
million, respectively. Therefore, the compensation expense for the
quarters ended November 30, 2008 and 2007 are not representative of the
compensation expense for the entire fiscal year. There have been no
material changes in the assumptions used to compute compensation expense during
the current quarter.
The
company granted 0.5 million restricted stock units under the new Walgreen Co.
Restricted Stock Unit Award Program and 0.5 million performance shares under the
new Walgreen Co. Performance Share Program for the quarter ended November 30,
2008. In accordance with SFAS No. 123(R), compensation expense is
recognized on a straight line basis based on a three year cliff vesting schedule
for the Restricted Stock Unit Award Program and straight line over a three year
vesting schedule for the Performance Share Program. For the quarter
ended November 30, 2008 the company recognized $5 million of expense related to
these new plans.
(5) The
company provides certain health insurance benefits for retired employees who
meet eligibility requirements, including age, years of service and date of
hire. The costs of these benefits are accrued over the period earned.
The company's postretirement health benefit plans are not funded.
(6) The
company guarantees a credit agreement on behalf of SureScripts-RxHub, LLC, which
provides electronic prescription data services. This credit
agreement, for which SureScripts-RxHub, LLC is primarily liable, has an
expiration date of June 30, 2011. The liability was $9 million at
November 30, 2008, $8 million at August 31, 2008 and $5 million at November 30,
2007. The maximum amount of future payments that could be required to
be paid under the guaranty is $25 million, of which $13 million may be
recoverable from another guarantor. In addition, under certain
circumstances the company may be required to provide an additional guarantee of
up to $10 million, of which $8 million may be recoverable from other
guarantors. This guarantee arose as a result of a business decision
between parties to ensure that the operations of SureScripts-RxHub, LLC would
have additional support to access financing. Should
SureScripts-RxHub, LLC default or become unable to pay their debts, the company
would be required to fulfill our portion of this guarantee.
(7) The dilutive effect of
outstanding stock options on earnings per share is calculated using the treasury
stock method. Stock options are anti-dilutive and excluded from the
earnings per share calculation if the exercise price exceeds the average market
price of the common shares for the periods presented. At November 30,
2008 and 2007, outstanding options to purchase common shares of 49,251,284 and
11,011,274 were excluded from the calculation.
(8)
Short-term borrowings and long-term debt consists of the following at November
30 (in millions):
In fiscal
2009 and 2008 the company issued commercial paper to support working capital
needs. The short-term borrowings under the commercial paper program had the
following characteristics at November 30 (in millions):
The
carrying value of the commercial paper approximates the fair value in both
fiscal years.
In
connection with our commercial paper program, we maintained two unsecured backup
syndicated lines of credit that total $1,200 million. The first $600
million facility expires on August 10, 2009; the second expires on August 12,
2012. Our ability to access these facilities is subject to our
compliance with the terms and conditions of the credit facilities, including
financial covenants. The covenants require us to maintain certain
financial ratios related to minimum net worth and priority debt, along with
limitations on the sale of assets and purchases of investments. On
October 12, 2007, we entered into an additional $100 million unsecured line of
credit facility and on November 30, 2007, that credit facility was amended and
increased to include an additional $200 million, for a total of $300 million
unsecured credit. That facility expired on December 31,
2007. On May 15, 2008, we entered into an additional $500 million
unsecured line of credit facility. That facility expired on July 31,
2008. These lines of credit were subject to similar covenants as the
syndicated lines of credit. The company pays a facility fee to the
financing bank to keep the line of credit facility active. As of
November 30, 2008, there have been no borrowings against the credit
facilities. On December 9, 2008, we entered into an additional $175
million line of credit that expires on December 31, 2008.
On July
17, 2008, we issued notes totaling $1,300 million bearing an interest rate of
4.875% paid semiannually in arrears on February 1 and August 1 of each
year, beginning on February 1, 2009. The notes will mature on
August 1, 2013. We may redeem the notes, at any time in whole or from time
to time in part, at our option at a redemption price equal to the greater of:
(1) 100% of the principal amount of the notes to be redeemed; or
(2) the sum of the present values of the remaining scheduled payments of
principal and interest thereon (not including any portion of such payments of
interest accrued as of the date of redemption), discounted to the date of
redemption on a semiannual basis (assuming a 360-day year consisting of twelve
30-day months) at the Treasury Rate, plus 30 basis points, plus accrued interest
on the notes to be redeemed to, but excluding, the date of
redemption. If a change of control triggering event occurs, unless we
have exercised our option to redeem the notes, we will be required to offer to
repurchase the notes at a purchase price equal to 101% of the principal amount
of the notes plus accrued and unpaid interest to the date of
purchase. The notes will be unsecured senior debt obligations and
will rank equally with all other unsecured senior indebtedness. The notes are
not convertible or exchangeable. Total issuance costs relating to
this offering were $9 million, which included $8 million in underwriting
fees. The fair value of the notes as of November 30, 2008, was $1,327
million.
(9) The
company is involved in various legal proceedings incidental to the normal course
of business and is subject to various investigations, inspections, audits,
inquiries and similar actions by governmental authorities responsible for
enforcing the laws and regulations to which the company is
subject. These include a lawsuit for which a $31 million
judgment was entered against the company in October 2006. The company
has appealed this judgment.
In
addition, on April 16, 2008, the Plumbers and Steamfitters Local No. 7 Pension
Fund filed a putative class action suit against the company and its
former Chief Executive Officer and Chief Operating Officer in the United
States District Court for the Northern District of Illinois. The suit
was filed on behalf of purchasers of company common stock during the period
between June 25, 2007, and November 29, 2007. The complaint,
which was amended on October 16, 2008 charges the company and its
former Chief Executive Officer and Chief Operating Officer with violations
of Section 10(b) of the Securities Exchange Act of 1934, claiming that the
company misled investors by failing to disclose declining rates of growth in
generic drug sales and a contract dispute with a pharmacy benefits manager that
allegedly had a negative impact on earnings. The company and the officers named
in the suit believe the allegations are without merit, and intend to defend
against them vigorously.
Management
is of the opinion that although the outcome of these and other litigation and
investigations cannot be forecast with certainty, the final dispositions should
not have a material adverse effect on the company's consolidated financial
position or results of operations.
(10) We
adopted the provisions of SFAS 157, Fair Value Measurements for
financial assets and liabilities beginning in the first quarter of fiscal
2009. We currently do not hold any financial assets or liabilities
that are included within the scope of this statement. Our debt
instruments are not reported at fair value in our statement of financial
position and as a result, we will continue to report under the guidance of SFAS
107, Disclosures about Fair
Value of Financial Instruments that requires us to disclose the fair
value of our debt in the footnotes.
(11)
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, Noncontrolling
Interest in Consolidated Financial Statements – an amendment of Accounting
Research Bulletin No. 51. The objective of this statement is
to improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement significantly changes the accounting for
transactions with minority interest holders. This statement, which
will be effective for the first quarter of fiscal 2010, is not expected to have
a material impact on our consolidated financial position or results of
operations.
In
December 2007, the FASB issued SFAS No 141(R), Business
Combinations. This statement establishes principles and
requirements for how the acquirer recognizes and measures identifiable assets
acquired, liabilities assumed and any noncontrolling interest in a business
combination. In addition the statement provides a revised definition
of a business, shifts from the purchase method to the acquisition method,
expenses acquisition-related transaction costs, recognizes contingent
consideration and contingent assets and liabilities at fair value and
capitalizes acquired in-process research and development. This statement, which
will be effective for the first quarter of fiscal 2010, will be applied
prospectively to business combinations. In addition, changes in an
acquired entity’s deferred tax assets and uncertain tax positions after the
measurement period will impact income tax expense.
INTRODUCTION
Walgreens
is principally a retail drugstore chain that sells 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 in retail pharmacies,
as well as through the mail, by telephone and via the Internet. As of
November 30, 2008, we operated 7,123 locations in 49 states, the District of
Columbia, Guam and Puerto Rico. Total locations do not include 293
convenient care clinics operated by Take Care Health Systems, Inc.
The
drugstore industry is highly competitive. In addition to other
drugstore chains, independent drugstores and mail order prescription providers,
we also compete with various other retailers including grocery stores,
convenience stores, mass merchants and dollar stores.
The
long-term outlook for prescription utilization is strong due in part to the
aging population and the continued development of innovative drugs that improve
quality of life and control health care costs. 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 prescription drugs.
We
believe deteriorating economic conditions and heightened turmoil in the
financial markets have adversely impacted discretionary consumer spending,
including spending at retail drugstores. It is unclear the extent to which
these conditions will persist and what overall impact they will have on future
consumer spending.
Front-end
sales have continued to grow due to strengthening core categories, such as
consumables, over-the-counter non-prescription drugs, household products and
beauty care items. Walgreens strong name recognition continues to
drive private brand sales, which are included in these core
categories.
We
continue to expand into new markets and increase penetration in existing
markets. To support our growth, we are investing in prime locations, technology
and customer service initiatives. Retail organic growth continues to
be our primary growth vehicle; however, consideration is given to retail and
other acquisitions that provide a unique opportunity and strategic fit for our
business.
We are
currently engaged in company-wide strategic initiatives to broaden
access to our products and services, enhance the customer experience for our
shoppers, patients and payors and reduce costs to improve
productivity. These strategies are intended to enable us to provide
the most convenient access to consumer goods and services, and pharmacy and
health and wellness services; offer a consistent customer experience across all
channels; and ensure that cost, culture and capabilities support and enable our
strategies. On October 30, 2008, we announced an initiative to
improve efficiency and effectiveness, which targets $1 billion in annual cost
savings by fiscal 2011. In conjunction with this initiative, we
anticipate incurring total costs of approximately $300 million to $400 million
over fiscal 2009 and 2010. During the current quarter we incurred
approximately $17 million in pre-tax costs associated with these
programs. There were no significant savings realized in the current
quarter.
OPERATING
STATISTICS
RESULTS
OF OPERATIONS
Net
earnings for the first quarter ended November 30, 2008 were $408 million or
$0.41 per share (diluted). This was a 10.4% decrease over the same
quarter last year. The net earnings decrease resulted from lower
gross margins, higher selling, general and administrative expenses as a
percentage of sales and higher interest costs.
Net sales
for the first quarter increased by 6.6% to $14,947 million. Drugstore
sales increases resulted from sales gains in existing stores and added sales
from new stores, each of which include an indeterminate amount of market-driven
price changes. Sales in comparable drugstores were up 1.7% for the
quarter. Comparable drugstores are defined as those that have been
open for at least twelve consecutive months without closure for seven or more
consecutive days and without a major remodel or a natural disaster in the past
twelve months. Relocated and acquired stores are not included as
comparable stores for the first twelve months after the relocation or
acquisition. We operated 7,123 locations as of November 30, 2008,
compared to 6,139 a year earlier.
Prescription
sales increased by 6.2% for the first quarter and represented 65.9% of total
sales. In the prior year, prescription sales increased 11.1% and
comprised 66.1% of total sales. Comparable drugstore prescription
sales were up 2.6% in the current quarter. The effect of generic
drugs, which have a lower retail price, replacing brand name drugs reduced
prescription sales by 2.3% in the current quarter versus 4.2% last year, while
the effect on total sales was a reduction of 1.4% in the current quarter versus
2.6% in the prior year. Third party sales, where reimbursement is
received from managed care organizations as well as government and private
insurance, were 95.4% of prescription sales compared to 95.1% a year
ago. The total number of prescriptions filled for the quarter was
approximately 156 million compared to 151 million for the same period last
year.
Front-end
sales increased 7.2% for the current quarter and were 34.1% of total
sales. In comparison, prior year front end sales increased 9.1% and
comprised 33.9% of total sales. In addition to new stores, the
increase is due in part to improved sales dollars related to consumables,
non-prescription drugs and household items. Comparable front-end
sales were flat in the current quarter compared to a 4.6% increase last
year.
Gross
margin as a percent of sales was 27.8% in the current quarter compared to 28.0%
last year. Overall margins were negatively impacted by non-retail
businesses, which have lower margins and are becoming a greater part of the
total business and a higher provision for LIFO. This was partially
offset by an improvement in retail pharmacy margins, which were positively
influenced by generic drug sales, but to a lesser extent negatively influenced
by the growth in third party pharmacy sales and lower market driven
reimbursements. Front-end margins remained essentially flat from the
prior year.
We use
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 the interim financial statements are
estimated. Cost of sales included a LIFO provision of $43 million for
the current quarter compared to a provision of $27 million a year
ago. Our estimated annual inflation rate was 2.25% for the current
quarter compared to 1.50% a year ago. The increase is attributed to
higher anticipated inflation for non-prescription drugs and front-end
merchandise.
Gross
profit increased 5.9% in this year’s first quarter versus 9.7% last
year. The change from the prior year is primarily due to lower sales
growth.
Selling,
general and administrative expenses as a percentage of sales were 23.3% for the
current quarter compared to 22.8% a year ago. Higher occupancy
expenses, store closing costs, amortization expenses and other miscellaneous
expenses were partially offset by lower employee benefit plan expenses and store
direct expenses as a percentage of sales.
Selling,
general and administrative expenses increased 9.1% this year compared to 10.0% a
year ago primarily due to store level salaries and expenses. Although
store level salaries and expenses increased at a faster rate than sales, the
rate of growth for the current year was lower than a year ago.
Interest
was a net expense of $15 million in the current quarter compared to a net
expense of zero in the prior year. The increase in interest expense
is primarily attributed to the issuance of long-term debt. The
current year’s interest expense is net of $5 million, which was capitalized to
construction projects versus $7 million capitalized last
year.
The
effective tax rate was 37.6% for the first quarter as compared to 37.4% for a
year ago. The increase is attributed to additional provisions for
state tax matters.
CRITICAL
ACCOUNTING POLICIES
The
consolidated condensed financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
include amounts based on management's prudent judgments and
estimates. Actual results may differ from these
estimates. Management believes that any reasonable deviation from
those judgments and estimates would not have a material impact on our
consolidated financial position or results of operations. To the
extent that the estimates used differ from actual results, however, adjustments
to the statement of earnings and corresponding balance sheet accounts would be
necessary. These adjustments would be made in future
statements. For a complete discussion of all our significant
accounting policies please see our 2008 annual report on Form
10-K. Some of the more significant estimates include goodwill and
other intangible asset impairment, allowance for doubtful accounts, vendor
allowances, liability for closed locations, liability for insurance claims, cost
of sales, and income taxes. We use the following methods to determine
our estimates:
LIQUIDITY
AND CAPITAL RESOURCES
Cash and
cash equivalents were $886 million at November 30, 2008, compared to $295
million at November 30, 2007. Short-term investment objectives are to
minimize risk, maintain liquidity and maximize after-tax yields. To
attain these objectives, investment limits are placed on the amount, type and
issuer of securities. Investments are principally in U.S. Treasury
market funds.
Net cash
provided by operating activities was $312 million compared to $390 million a
year ago. The decrease is attributed to lower net earnings, decreased
cash from accounts receivable and inventories partially offset by an increase in
cash from accounts payable. Cash provided by operations is the
principal source of funds for expansion, acquisitions, remodeling programs,
dividends to shareholders and stock repurchases. In fiscal 2009, we
supplemented cash provided by operations with short-term
borrowings.
Net cash
used for investing activities was $684 million versus $531 million last
year. Additions to property and equipment were $638 million compared
to $490 million last year. During the current quarter we added a
total of 220 locations (189 net) compared to 169 last year (142
net). There were 59 owned locations added during the quarter and 82
under construction at November 30, 2008 versus 53 owned locations added and 60
under construction as of November 30, 2007.
Capital
expenditures throughout fiscal 2009 are expected to be $1.8 billion, excluding
business acquisitions. We expect to open approximately 540 new
drugstores in fiscal 2009, with a net increase of approximately 475 drugstores
and anticipate having a total of more than 7,000 drugstores in
2010. We intend to increase new drugstore organic growth between 4.0
percent and 4.5 percent in fiscal 2010 and between 2.5 percent and 3.0 percent
in 2011. In the first quarter, we added a total of 220 locations, of
which 200 were new or relocated drugstores, with a net gain of 187 drugstores
after relocations and closings. We are continuing to relocate stores to more
convenient and profitable freestanding locations. In addition to new
stores, expenditures are planned for distribution centers and
technology. A new distribution center in Windsor, Connecticut is
anticipated to open in the current fiscal year.
Net cash
provided by financing activities was $815 million compared to $181 million last
year. Net proceeds from short-term borrowings during the current
period were $998 million compared to $317 million a year ago. Shares
totaling $99 million were purchased to support the needs of the employee stock
plans during the current period as compared to $78 million a year ago. On
January 10, 2007, a new stock repurchase program (“2007 repurchase program”) of
up to $1,000 million was announced, to be executed over four
years. No repurchases were made during the current or prior year’s
quarter and we do not anticipate executing stock repurchases under the 2007
repurchase program while having short-term debt outstanding. We will
continue to repurchase shares to support the needs of the employee stock
plans. In the first three months of the current year, we had
proceeds related to employee stock plans of $32 million versus $68 million for
the same period last year. Cash dividends paid were $111 million
during the first three months versus $94 million for the same period a year
ago.
We had
$1,068 million of commercial paper outstanding at a weighted average interest
rate of 1.80% at November 30, 2008. In connection with our commercial
paper program, we maintain two unsecured backup syndicated lines of credit that
total $1,200 million. The first $600 million facility expires on
August 10, 2009, the second on August 12, 2012. Our ability to access
these facilities is subject to our compliance with the terms and conditions of
the credit facilities, including financial covenants. The covenants
require us to maintain certain financial ratios related to minimum net worth and
priority debt, along with limitations on the sale of assets and purchases of
investments. As of November 30, 2008 we were in compliance with all
such covenants. The company pays a facility fee to the financing bank
to keep this line of credit facility active. We do not expect any
borrowings under these facilities, together with our outstanding commercial
paper, to exceed $1,200 million. On December 9, 2008, we entered into
an additional $175 million line of credit that expires on December 31,
2008.
Our
current credit ratings are as follows:
In
assessing our credit strength, both Moody's and Standard & Poor's consider
our business model, capital structure, financial policies and financial
statements. Our credit ratings impact our future borrowing costs,
access to capital markets and operating lease costs.
CONTRACTUAL
OBLIGATIONS AND COMMITMENTS
The
following table lists our contractual obligations and commitments as of November
30, 2008:
* Recorded on balance sheet.
OFF-BALANCE
SHEET ARRANGEMENTS
Letters
of credit are issued to support purchase obligations and commitments (as
reflected on the Contractual Obligations and Commitments table) as follows (In
millions):
We have
no other off-balance sheet arrangements other than those disclosed on the
Contractual Obligations and Commitments table and a credit agreement guaranty on
behalf of SureScripts-RxHub, LLC. This agreement is described more
fully in Note 6 in the Notes to Consolidated Condensed Financial
Statements.
Both
on-balance sheet and off-balance sheet financing are considered when targeting
debt to equity ratios to balance the interests of equity and debt (including
real estate) investors. This balance allows us to lower our cost of
capital while maintaining a prudent level of financial risk.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements. This statement, and the related pronouncements,
defines and provides guidance when applying fair value measurements to
accounting pronouncements that require or permit such measurements. We
adopted the provisions of SFAS 157, Fair Value Measurements for
financial assets and liabilities beginning in the first quarter of fiscal
2009. FASB Staff Position No. 157-2 deferred the effective date of
nonfinancial asses and liabilities until fiscal year 2010. We do not
expect to have a material impact in 2010 when we apply the statement to our
nonfinancial assets and liabilities.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51. The objective of this statement is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The
statement significantly changes the accounting for transactions with minority
interest holders. This statement, which will be effective for the
first quarter of fiscal 2010, is not expected to have a material impact on our
consolidated financial position or results of operations.
In
December 2007, the FASB issued SFAS No 141(R), Business
Combinations. This statement establishes principles and
requirements for how the acquirer recognizes and measures identifiable assets
acquired, liabilities assumed and any noncontrolling interest in a business
combination. In addition the statement provides a revised definition
of a business, shifts from the purchase method to the acquisition method,
expenses acquisition-related transaction costs, recognizes contingent
consideration and contingent assets and liabilities at fair value and
capitalizes acquired in-process research and development. This statement, which
will be effective for the first quarter of fiscal 2010, will be applied
prospectively to business combinations. In addition, changes in an
acquired entity’s deferred tax assets and uncertain tax positions after the
measurement period will impact income tax expense.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
information in this Form 10-Q, as well as in other public filings, the company
website, 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 and
location of new store openings, outcomes of litigation, the level of capital
expenditures, and demographic trends. Forward looking information
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 risk and
uncertainties are discussed in item 1A of the company’s annual report on Form
10-K for the period ended August 31, 2008 as well as other documents filed with
the Securities and Exchange Commission. 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
3. QUALITATIVE AND QUANTITATIVE DISCLOSURE 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.
Item
4. CONTROLS AND PROCEDURES
Based on
their evaluation as of November 30, 2008, pursuant to Exchange Act Rule
13a-15(b), the company's management, including its Chief Executive Officer and
Chief Financial Officer, conclude the company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)) are
effective.
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
November 30, 2008 were identified that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
Item
1. LEGAL PROCEEDINGS
On April
16, 2008, the Plumbers and Steamfitters Local No. 7 Pension Fund filed a
putative class action suit against the company and its former Chief
Executive Officer and Chief Operating Officer in the United States District
Court for the Northern District of Illinois. The suit was filed on
behalf of purchasers of company common stock during the period between June 25,
2007, and November 29, 2007. The complaint which was amended on
October 16, 2008 charges the company and its former Chief Executive Officer
and Chief Operating Officer with violations of Section 10(b) of the Securities
Exchange Act of 1934, claiming that the company misled investors by failing to
disclose declining rates of growth in generic drug sales and a contract dispute
with a pharmacy benefits manager that allegedly had a negative impact on
earnings. The company and the officers named in the suit believe the allegations
are without merit, and intend to defend against them vigorously. Management
is also of the opinion that although the outcome of this 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.
Item
6. EXHIBITS
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.
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