Walgreens 2012 Annual Report Download - page 40

Notes to Consolidated Financial Statements (continued)
38 2012 Walgreens Annual Report
could also result in changes to management’s assessment of current liabilities and
contingencies. The ultimate costs of resolving these claims may be substantially
higher or lower than the amounts reserved. Due to the inherent difficulty of predicting
the outcome of litigation and other legal proceedings, the Company cannot predict
the eventual outcome of these matters, and it is reasonably possible that some of
them could be resolved unfavorably to the Company. As a result, it is possible that
the Company’s results of operations or cash flows in a particular fiscal period could be
materially affected by an unfavorable resolution of pending litigation or contingencies.
However, based on its current knowledge, management does not expect reasonably
possible losses relating to the outcome of current litigation and legal proceedings,
after consideration of applicable reserves and rights to indemnification, to be material
to the Company’s consolidated financial position.
On April 4, 2012, the United States Drug Enforcement Administration (DEA) served
administrative inspection warrants on six Walgreen retail pharmacies in Florida
and removed certain controlled substance prescription records and other related
documents. DEA also served an inspection warrant and an administrative subpoena
for records on the Walgreens distribution center in Jupiter, Florida. DEA issued
a separate administrative subpoena for records from the Walgreens facility in
Orlando, Florida on August 8, 2012. On September 14, 2012, DEA served an
Order to Show Cause (OSC) and Immediate Suspension Order (ISO) on the Jupiter
Distribution Center and placed under seal the controlled substance inventory at
that facility. Walgreens timely requested a hearing to demonstrate why DEA
should not permanently revoke the controlled substance registration from the
Jupiter Distribution Center. On October 10, 2012, Walgreens filed a petition in
the U.S. Court of Appeals for the District of Columbia challenging DEA’s authority
to issue the ISO.
SEC regulations require disclosure of certain environmental matters when a governmental
authority is a party to the proceedings and the proceedings involve potential monetary
sanctions that management reasonably believes could exceed $100,000. On July 2,
2012, a number of California District Attorneys served the Company with a civil
complaint filed in the Alameda County Superior Court alleging certain violations of
the state’s hazardous waste regulations related to the proper disposal of various
materials from the Company’s retail stores and seeking injunctive relief, civil penalties
and certain fees and expenses. The California District Attorneys filed an amended
complaint on July 12, 2012, and a motion for preliminary injunction on August 6,
2012. The Company intends to work with state and local officials in an effort to
resolve this matter, but cannot predict the ultimate outcome of these efforts.
12. Capital Stock
The Board of Directors’ long-term capital policy is to maintain a strong balance sheet
and financial flexibility; reinvest in its core strategies; invest in strategic opportunities
that reinforce its core strategies and meet return requirements; and return surplus
cash flow to shareholders in the form of dividends and share repurchases over the
long term. In connection with the Company’s capital policy, its Board of Directors
authorized a share repurchase program (2009 repurchase program) and set a long-
term dividend payout ratio target between 30 and 35 percent of net income. The
2009 repurchase program, which was completed in September 2010, allowed for the
repurchase of up to $2.0 billion of the Company’s common stock. On October 13,
2010, the Board of Directors authorized the 2011 repurchase program, which was
completed in July 2011, which allowed for the repurchase of up to $1.0 billion of
the Company’s common stock. On July 13, 2011, the Board of Directors authorized
the 2012 repurchase program, which allows for the repurchase of up to $2.0 billion
of the Company’s common stock prior to its expiration on December 31, 2015.
Activity related to these programs was as follows (In millions):
Fiscal Year Ended 2012 2011 2010
2009 stock repurchase program $ — $ 360 $ 1,640
2011 stock repurchase program — 1,000 —
2012 stock repurchase program 1,151 424 —
$ 1,151 $ 1,784 $ 1,640
The Company determines the timing and amount of repurchases from time to time
based on its assessment of various factors including prevailing market conditions,
alternate uses of capital, liquidity, the economic environment and other factors.
The Company anticipates that the pace of any future share repurchase activity may
be significantly curtailed from the levels achieved in the preceding two years due to
its investment in Alliance Boots. The timing and amount of these purchases may
change at any time and from time to time. The Company has repurchased and
may from time to time in the future repurchase shares on the open market through
Rule 10b5-1 plans, which enable a company to repurchase shares at times when
it otherwise might be precluded from doing so under insider trading laws.
In addition, the Company continued to repurchase shares to support the needs of
the employee stock plans. Shares totaling $40 million were purchased to support the
needs of the employee stock plans during fiscal 2012 as compared to $244 million
in fiscal 2011. At August 31, 2012, 58,849,238 shares of common stock were
reserved for future issuances under the Company’s various employee benefit plans.
13. Stock Compensation Plans
The Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) provides for the
granting of options to purchase common stock over a 10-year period to eligible
non-executive employees upon the purchase of Company shares, subject to certain
restrictions. Employees may purchase Company shares through cash purchases or
loans. The option price is the closing price of a share of common stock on the grant
date. Options may be granted under this Plan until September 30, 2012, for an
aggregate of 42,000,000 shares of common stock. At August 31, 2012, there were
13,366,481 shares available for future grants. The options granted during fiscal
2012, 2011 and 2010 have a three-year vesting period.
The Walgreen Co. Executive Stock Option Plan provides for the granting of options to
eligible key employees to purchase common stock over a 10-year period, at a price
not less than the fair market value on the date of the grant. Under this Plan, options
may be granted until January 13, 2020, for an aggregate of 63,400,000 shares of
common stock. At August 31, 2012, 15,984,563 shares were available for future
grants. The options granted during fiscal 2012, 2011 and 2010 have a three-year
vesting period.
The Walgreen Co. Broad Based Employee Stock Option Plan provides for the granting
of options to eligible non-executive employees to purchase common stock over a
10-year period, at a price not less than the fair market value on the date of the grant.
Under this Plan, on March 11, 2003, substantially all non-executive employees,
in conjunction with the opening of the Company’s 4,000th store, were granted a stock
option to purchase 100 shares. The Plan authorized the grant of an aggregate of
15,000,000 shares of common stock. At August 31, 2012, 7,905,555 shares were
available for future grants. The options vested and became exercisable on March 11,
2006, and any unexercised options will expire on March 10, 2013, subject to earlier
termination if the optionee’s employment ends.
A summary of information relative to the Company’s stock option plans follows:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (Years) (In millions)
Outstanding
at August 31, 2011 49,033,846 $ 33.70 6.04 $ 193
Granted 7,801,023 38.34
Exercised (3,245,380) 27.46
Expired/Forfeited (3,553,520) 35.22
Outstanding
at August 31, 2012 50,035,969 $ 34.18 5.60 $ 175
Vested or expected to vest
at August 31, 2012 29,037,001 $ 35.35 3.90 $ 108
Exercisable
at August 31, 2012 20,147,917 $ 32.76 7.99 $ 65