UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2012
 
o
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.)
108 Wilmot Road, Deerfield, Illinois
 
60015
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code:  (847) 315-2500
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($.078125 Par Value)
 
                              New York Stock Exchange
   
                              The NASDAQ Stock Market LLC
   
                              Chicago Stock Exchange
 
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 x No 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 o No 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No 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. o
 
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,” “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 o No x
 
As of February 29, 2012, the aggregate market value of Walgreen Co. common stock held by non-affiliates (based upon the closing transaction price on the New York Stock Exchange on February 29, 2012) was approximately $28.6 billion. As of August 31, 2012, there were 944,055,334 shares of Walgreen Co. common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended August 31, 2012, 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 Annual Meeting of Shareholders to be held January 9, 2013, are incorporated by reference into Part III of this Form 10-K as indicated herein.




TABLE OF CONTENTS


Part I
   
 
Executive Officers of the Registrant
   
Part II
   
   
Part III
   
   
Part IV
   




 
 

PART I
 
Item 1.  Business
References in this Form 10-K to “Walgreens”, the “Company,” “we,” “us” or “our” refer to Walgreen Co. and its subsidiaries included in the consolidated financial statements and do not include unconsolidated partially-owned entities, such as Alliance Boots GmbH (Alliance Boots), of which we own 45% of the outstanding share capital, except as otherwise indicated or the context otherwise requires. Our fiscal year ends on August 31, and references herein to “fiscal 2012” refer to our fiscal year ended August 31, 2012.

Overview

Walgreen Co., together with its subsidiaries, operates the largest drugstore chain in the United States with net sales of $71.6 billion in the fiscal year ended August 31, 2012. We provide our customers with convenient, multichannel access to consumer goods and services, pharmacy, and health and wellness services in communities across America. We offer our products and services through drugstores, as well as through mail, by telephone and online.

We sell prescription and non-prescription drugs as well as general merchandise, including household items, convenience and fresh foods, personal care, beauty care, photofinishing and candy. Our pharmacy, health and wellness services include retail, specialty, infusion and respiratory services, mail service, convenient care clinics and worksite health and wellness centers. These services help improve health outcomes and manage costs for payers including employers, managed care organizations, health systems, pharmacy benefit managers and the public sector. Our Take Care Health Systems subsidiary is a manager of worksite health and wellness centers and in-store convenient care clinics, with more than 700 locations throughout the United States.

Since August 2, 2012, we have held a 45% investment interest in Alliance Boots GmbH, a leading international pharmacy-led health and beauty group, which we account for using the equity method of accounting. Alliance Boots delivers a range of products and services to customers including pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution. We also have the right, but not the obligation, to acquire the remaining 55% interest in Alliance Boots at any time during the period beginning February 2, 2015 and ending on August 2, 2015, as described under “Business Development” below.

Walgreen Co. was incorporated as an Illinois corporation in 1909 as a successor to a business founded in 1901. Our principal executive offices are located at 108 Wilmot Road, Deerfield, Illinois 60015. The Company is principally in the retail drugstore business and its operations are within one reportable segment.

Business Development

As of August 31, 2012, Walgreens operated 8,385 locations in 50 states, the District of Columbia, Guam and Puerto Rico. In 2012, the Company opened or acquired 266 locations for a net increase of 175 locations after relocations and closings. Total locations do not include 360 Take Care clinics that are operated primarily within our Walgreens locations or locations of unconsolidated partially owned entities such as Alliance Boots GmbH.

   
Number of Locations
 
Location Type
 
2012
   
2011
   
2010
 
Drugstores
    7,930       7,761       7,562  
Worksite Health and Wellness Centers
    366       355       367  
Infusion and Respiratory Services Facilities
    76       83       101  
Specialty Pharmacies
    11       9       14  
Mail Service Facilities
    2       2       2  
Total
    8,385       8,210       8,046  


Walgreens goal is to provide the most convenient multichannel access to consumer goods and services, pharmacy, health and wellness services through our 7,930 community based drugstores, as well as through our specialty pharmacy, home infusion and respiratory services, worksite health and wellness centers and retail clinic businesses. As of August 2012, approximately 74.1% of the United States population lived within five miles of a Walgreens and 6.0 million shoppers visited our stores daily. In addition to store shoppers, Walgreens.com received approximately 36.8 million visits per month in fiscal 2012. Designed to reward our most valuable customers and encourage shopping in stores and online, in September 2012 we launched our loyalty program, BalanceTM Rewards, where customers earn points for purchasing select merchandise and the option to redeem rewards earned in real time at our stores or online.

We seek to grow pharmacy, front-end and online market share through new store growth, comparable store sales increases, pharmacy prescription file purchases and strategic acquisitions. When evaluating strategic acquisitions and investment opportunities that meet our long-term growth objectives, consideration is given to retail, health and wellbeing enterprises and other acquisitions and investments that provide unique opportunities and fit our business objectives.

On August 2, 2012, we completed the initial investment contemplated by the Purchase and Option Agreement dated June 18, 2012, by and among Walgreens, Alliance Boots GmbH and AB Acquisitions Holdings Limited (the “Purchase and Option Agreement”), which resulted in our acquisition of 45% of the issued and outstanding share capital of Alliance Boots, in exchange for $4.025 billion in cash and 83,392,670 shares of Walgreens common stock. Alliance Boots is a leading international, pharmacy-led health and daily living retailing and pharmaceutical wholesaling and distribution business. See “Description of Business-Overview of Alliance Boots” below for additional information.

The Purchase and Option Agreement also provides, among other things and subject to the satisfaction or waiver of specified conditions, that we will have the right, but not the obligation, to acquire the remaining 55% interest in Alliance Boots GmbH in exchange for £3.133 billion in cash, payable in British pounds sterling, and 144,333,468 shares of Walgreens common stock, subject to certain specified adjustments (second step transaction). If Walgreens exercises the call option, in certain limited circumstances, Walgreens may be required to make the entire second step transaction payment in cash. The call option is exercisable by us, in our sole discretion, at any time during the period beginning February 2, 2015 and ending August 2, 2015. In addition, in certain specified cases, if Walgreens does not exercise the call option, or Walgreens has exercised the call option but the second step transaction does not close, Walgreens may be required to return to the sellers an approximately 3% interest in Alliance Boots GmbH in exchange for a nominal amount. Walgreens initial investment and the call option excludes the Alliance Boots minority interest in Galenica Ltd. (Galenica). The Alliance Boots investment in Galenica continues to be legally owned by Alliance Boots for the benefit of Alliance Boots shareholders other than Walgreens. Additional information regarding our investment in Alliance Boots is available in our Current Reports on Form 8-K filed on June 19, 2012 and August 6, 2012 (as amended by the Form 8-K/A filed on September 10, 2012).

Other strategic transactions since the beginning of fiscal 2012 included the acquisition of certain assets of BioScrip, Inc.’s (BioScrip) community specialty pharmacies, and centralized specialty and mail services pharmacy businesses, which advances community pharmacy and brings additional specialty pharmacy products and services closer to patients. The BioScrip acquisition also is expected to help grow Walgreens centralized specialty and mail service pharmacy operations. The Company also grew its infusion business in select markets through the acquisition of Crescent Pharmacy Holdings, LLC (Crescent). In September 2012, after the close of the fiscal year, we completed the purchase of a regional drugstore chain in the mid-South region of the United States that included 144 stores operated under the USA Drug, Super D Drug, May’s, Med-X and Drug Warehouse names. The USA Drug transaction also included corporate offices, a distribution center located in Pine Bluff, Arkansas and a wholesale and private brand business.  Significant acquisitions in prior years include the purchase of drugstore.com, inc. in fiscal 2011, which enhanced our online presence, and the acquisition of Duane Reade in fiscal 2010 that consisted of 258 Duane Reade stores in the New York City metropolitan area, corporate offices and two distribution centers.

We utilize our extensive retail network as a channel to provide affordable quality health and wellness services to our customers and patients, as illustrated by our ability to play a significant role in providing flu vaccines and other immunizations. We market our products and services to employers, governments, managed care organizations and pharmacy benefit managers, expanding beyond our traditional retail consumer model to contract directly with our payers. With our more than 75,000 health care providers including pharmacists, nurse practitioners and other health related professionals, Walgreens expects to continue to play a growing role in government and employer efforts to control escalating health care costs.

Prescription sales continued to be a large portion of the Company's business. In fiscal 2012, prescriptions accounted for 63.2% of sales compared to 64.7% in fiscal 2011. Third party sales, where reimbursement is received from managed care organizations, government and private insurance, were 95.6% of fiscal 2012 prescription sales consistent with 95.6% in fiscal 2011. Overall, Walgreens filled approximately 664 million prescriptions in 2012, a decrease of 54 million from fiscal 2011. Adjusted to 30-day equivalents, prescriptions filled were 784 million in fiscal 2012, 819 million in fiscal 2011 and 778 million in fiscal 2010. Walgreens accounted for 18.7% of the U.S. retail prescription drug market in fiscal 2012 compared to 20.0% and 19.5% in fiscal 2011 and 2010, respectively. Walgreens expects the aging population and the continued development of innovative drugs that improve quality of life and control health care costs will continue to drive demand for prescription drugs.
 
During fiscal 2012, the Company added $1.6 billion to property and equipment, which included approximately $0.7 billion related to stores, $0.8 billion for information technology and $0.1 billion related to other locations. The Company implemented new point-of-sale store technology chain wide in fiscal 2012 in preparation for the loyalty program introduction. Capital expenditures for fiscal 2013 are currently expected to be between $1.6 billion and $1.8 billion, excluding acquisitions and prescription file purchases, although the actual amount may vary depending upon a variety of factors, including, among other things, the timing of implementation of certain capital projects. We completed our three-year plan to refresh approximately 5,000 stores through our "customer-centric retailing" initiative in fiscal 2012. As of August 31, 2012, we had opened or converted stores with our pilot “Well Experience” store format in approximately 350 locations, including a market-wide transformation in the Indianapolis area and new flagship stores in select markets including Chicago, New York City, Las Vegas and Puerto Rico.

We plan to continue pursuing our goal to become a global leader in pharmacy, health and wellbeing solutions and the first choice for health and daily living in communities we serve, all designed to help our customers get, stay and live well. Our strategies are designed to further transform our traditional drugstore into a “retail health and daily living” store, creating community-centric healthcare integration with expanded pharmacy, health and wellness solutions. We seek to continue to deliver an outstanding customer experience through enhanced employee engagement and to expand our product and service offerings across new channels and markets where, in addition to our stores, customers and patients can find us through our health system pharmacies, worksite clinics, Walgreens.com, mobile applications, and social media sites.


Description of Business

Principal products produced and services rendered

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, household items, convenience and fresh foods, personal care, beauty care, photofinishing and candy. Prescription drugs represent our largest product class accounting for 63% of our total sales in fiscal 2012 followed by general merchandise and non-prescription drugs at 25% and 12%, respectively. Walgreens offers customers the choice to have prescriptions filled at the drugstore, as well as through the mail, and customers may also place orders by telephone and online.

We offer pharmacy, health and wellness solutions which include retail, specialty pharmacy, infusion and respiratory services, mail service, convenient care clinics and worksite clinics. Our drugstores sell prescription and non-prescription drugs and utilize our pharmacists to provide drug consultations and administer flu vaccines and other immunizations. Our integrated network of pharmacies allows easy access for customers to fill their prescriptions at any of our drugstores. In addition, our stores sell branded and private brand general merchandise.

We offer specialty pharmacy services that provide customers nationwide access to a variety of medications, services and programs for managing complex and chronic health conditions. Medications delivered to these customers often require special handling, are only available through limited distributions or involve a time-sensitive delivery. Specialty pharmacy patients typically require customized treatments in managing their medical conditions.

In addition, we offer our customers infusion therapy services including the administration of intravenous (IV) medications for cancer treatments, chronic pain, heart failure, and other infections and disorders which must be treated by IV. Walgreens provides these infusion services at home, at the workplace, in a physician's office or at a Walgreens alternate treatment site. We also provide clinical services such as laboratory monitoring, medication profile review, nutritional assessments and patient and caregiver education.

Customers can choose to have their prescriptions refilled through our mail service which allows customers to submit prescription refill requests online, over the phone or through e-prescribing. Our advanced pharmacy system offers pharmacists easy access to patient prescription records, which allows access to refills and emergency supplies at any of our pharmacies, eases prescription transfers, and enables any Walgreens pharmacist to provide ongoing treatment consultation.

Customers can also access our ecommerce solutions, which extend the convenience to purchase most products available within our drugstores as well as additional products sold exclusively online through our walgreens.com and drugstore.com websites, including beauty.com and visiondirect.com. Our websites allow consumers to purchase general merchandise including beauty, personal care, home medical equipment, contact lenses, vitamins and supplements and other health and wellness solutions. Our mobile applications also allow customers to refill prescriptions through their mobile device, download weekly promotions and find the nearest Walgreens drugstore.     

We also offer services through Take Care Health Systems, which manages our Take Care Clinics at select Walgreens drugstores throughout the country. Patient care at each of the Take Care Clinics is provided by Take Care Health Services, an independently owned state professional corporation. Nurse practitioners and physician assistants treat patients and are licensed to write prescriptions that can be filled at the patient's pharmacy of choice and to administer immunizations and other vaccines. Additionally, our Take Care Health Employer Solutions manages primary care, health and wellness, occupational health, pharmacy and fitness centers at large employer campuses. These centers provide primary-care services that allow employees and families to enjoy the full benefits of a dedicated physician in a convenient worksite setting.

Sources and availability of raw materials

Inventories are purchased from numerous domestic and foreign suppliers. We do not believe that the loss of any one supplier or group of suppliers under common control would have a material effect on the Company’s business.

Intellectual Property and Licenses

We market products and services under various trademarks, trade dress and trade names and rely on a combination of patent, copyright, trademark, service mark, and trade secret laws, as well as contractual restrictions to establish and protect our proprietary rights. We own numerous domain names, hold over fifty patents, have registered numerous trademarks, and have filed applications for the registration of a number of our other trademarks and service marks in various jurisdictions. We hold assorted business licenses (such as pharmacy, occupational, liquor and cigarette) having various lives within multiple legal jurisdictions, which are necessary for the normal operation of our business.

Seasonal variations in business

Our business is seasonal in nature, with the second fiscal quarter 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 cough, cold and flu season. See the caption “Summary of Quarterly Results (Unaudited)” on page 41 of the Annual Report to Shareholders for the year ended August 31, 2012 (“2012 Annual Report”), which section is incorporated herein by reference.

Working capital practices

The Company generally finances its inventory and expansion needs with internally generated funds. See “Management's Discussion and Analysis of Results of Operations and Financial Condition” on pages 18 through 25 of the 2012 Annual Report, which section is incorporated herein by reference.

Customers

The Company sells to numerous customers including various managed care organizations within both the private and public sectors. No customer accounted for ten percent or more of the Company's consolidated net sales in fiscal 2012.

Government contracts

The Company fills prescriptions for many state Medicaid public assistance plans. Revenues from all such plans were approximately 5.8% of total sales in fiscal 2012.

Regulation

Our business is subject to federal, state and local government laws, regulations and administrative practices. 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; the Patient Protection and Affordable Care Act (the ACA); 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 connection with the operation of our stores, distribution centers and other sites, we are subject to 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. Federal, state and local environmental protection requirements did not have a material effect upon capital expenditures, earnings or the competitive position of the Company in fiscal 2012. In addition, as we increase our activities in markets outside the United States, we are, and expect to be, subject to an increasing number of foreign laws and regulations, including retail and wholesale pharmacy, licensing, tax, foreign trade, intellectual property, privacy and data protection, currency, political and other business restrictions and requirements and local laws and regulations.

Competitive conditions

The drugstore industry is highly competitive. As a leader in the retail drug industry and as a retailer of general merchandise, Walgreens competes with various retailers, including chain and independent drugstores, mail order prescription providers, grocery stores, convenience stores, mass merchants, online pharmacies, warehouse clubs, dollar stores and other discount merchandisers. The Company competes primarily on the basis of service, convenience, variety and price. The Company's geographic dispersion helps offset the impact of temporary, localized 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.

Employees

At August 31, 2012, the Company employed approximately 240,000 persons, approximately 69,000 of whom were part-time employees working less than 30 hours per week. The foregoing does not include employees of unconsolidated partially owned entities, such as Alliance Boots GmbH, of which we own 45%.

Research and Development

The Company does not engage in any material research and development activities.

Overview of Alliance Boots

Walgreens has owned a 45% equity interest in Alliance Boots GmbH since August 2, 2012 and has a call option to acquire the remaining 55% equity interest during the six-month period beginning February 2, 2015 as described above. We account for our 45% investment in Alliance Boots using the equity method of accounting on a one-month lag basis. Because the closing of this investment occurred within one month of the Company’s fiscal year end, the results of operations of Alliance Boots GmbH are not reflected in the company’s reported net earnings for the fiscal quarter or year ended August 31, 2012.

Alliance Boots is a leading international, pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution business. As of March 31, 2012, its fiscal year end, Alliance Boots had, together with its associates and joint ventures, pharmacy-led health and beauty retail businesses in 11 countries and operated more than 3,330 health and beauty retail stores, of which over 3,200 had a pharmacy. In addition, Alliance Boots had approximately 625 optical practices, approximately 185 of which operated on a franchise basis. Its pharmaceutical wholesale and distribution businesses, including its associates and joint ventures, supplied medicines, other healthcare products and related services to more than 170,000 pharmacies, doctors, health centers and hospitals from over 370 distribution centers in 21 countries.

Pharmacy-led Health and Beauty Retailing.  Alliance Boots is a market leader in the pharmacy industry with stores located in the United Kingdom, Norway, the Republic of Ireland, the Netherlands, Thailand and Lithuania and through its associates and joint ventures in Switzerland, China, Italy, Russia and Croatia. In addition, as of March 31, 2012, there were 58 Boots branded stores operated in the Middle East on a franchised basis.  Alliance Boots seeks to locate its stores in convenient locations and to put the pharmacist at the heart of healthcare. Alliance Boots pharmacists are well placed to provide a significant role in the provision of healthcare services, working closely with other primary healthcare providers in the communities they serve.  Alliance Boots principal retail brand in the Health & Beauty Division is Boots, which Alliance Boots trades under in the United Kingdom, Norway, the Republic of Ireland, the Netherlands and Thailand. The Boots offering is differentiated from that of competitors due to the product brands that Alliance Boots owns and the “only at Boots” exclusive products.

Pharmaceutical Wholesaling and Distribution.  Alliance Boots pharmaceutical wholesaling and distribution businesses seek to provide high core service levels to pharmacists in terms of frequency of delivery, product availability, delivery accuracy, timeliness and reliability at competitive prices. Alliance Boots also offers its customers added value services that help pharmacists develop their own businesses. This includes membership in Alphega Pharmacy, Alliance Boots network for independent pharmacies, which had a membership of over 4,400 pharmacies in six countries as of March 31, 2012.  In addition to the wholesale of medicines and other healthcare products, Alliance Boots provides services to pharmaceutical manufacturers who are increasingly seeking to gain greater control over their product distribution while at the same time outsourcing non-core activities. These services include pre-wholesale and contract logistics, direct deliveries to pharmacies, and specialized medicine delivery including related home healthcare.

Product Brands.   In its Health & Beauty Division, Alliance Boots has product brands such as No7, Soltan and Botanics, together with newer brands launched in recent years, such as Boots Pharmaceuticals and Boots Laboratories.   Alliance Boots is seeking to continue to internationalize its key product brands, selling them to independent pharmacies, retail partners and distributors, and on owned internet shopping sites in countries where Alliance Boots does not have a retail presence. In the United States, Alliance Boots is seeking to grow the No7 brand, and in Europe its Boots Laboratories line of products is now sold by independent pharmacies in five countries as of March 31, 2012.   In addition, Alliance Boots has partnerships with a select number of third party brand owners to sell their products in Boots stores on an exclusive basis, sharing in the future brand equity. Alliance Boots also continues to manufacture a significant proportion of its most popular own brand and exclusive products.  Through its Pharmaceutical Wholesale Division and several of its associates, Alliance Boots currently sells Almus, its line of generic medicines, in five countries and Alvita, its line of patient care products, in six countries.

Financial Information about Foreign and Domestic Operations and Export Sales

All Company sales during the last three fiscal years occurred within the United States, Puerto Rico and Guam. There were no export sales. We account for our 45% investment in Alliance Boots, described under “Overview of Alliance Boots” above, using the equity method of accounting on a one-month lag basis, as described in Note 5 to the Company's Consolidated Financial Statements in Item 8 of this Form 10-K. As a result, no Alliance Boots sales are included in the net sales reported by the Company in its consolidated financial statements.

Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company’s share of the net income or loss and cash contributions and distributions to or from these entities. The Company’s investment in Alliance Boots, which closed on August 2, 2012, and the related call option were recorded as assets with a $7.0 billion aggregate value on the Company’s August 31, 2012 balance sheet, which represented 30.9% of the Company’s long-lived assets as of that date. Because the Company's investment in Alliance Boots is denominated in a foreign currency (British pounds sterling), translation gains or losses are expected to impact the value of the investment.  See Note 5 to the Company's Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.

Available information

We file with the Securities and Exchange Commission (SEC) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, proxy statements and registration statements. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically. We make available free of charge on or through our website at investor.walgreens.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file or furnish them to the SEC. The contents of the Company's website are not, however, a part of this report.

Cautionary Note Regarding Forward Looking Statements

This report and other documents that we file or furnish with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications.  Some of such forward-looking statements may be based on certain data and forecasts relating to our business and industry that we have obtained from internal surveys, market research, publicly available information and industry publications.  Industry publications, surveys and market research generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Statements that are not historical facts are forward-looking statements, including forward-looking information concerning our investment in Alliance Boots and the other transactions contemplated by the Purchase and Option Agreement with Alliance Boots and their possible effects, levels of business with Express Scripts customers, estimates of the impact of developments on our earnings and earnings per share, network participation, cough/cold and flu season, prescription volume, pharmacy sales trends, prescription margins, number and location of new store openings, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, competition, economic and business conditions, outcomes of litigation and regulatory matters, the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, acquisition and joint venture synergies, competitive strengths and changes in legislation or regulations. Words such as “expect,” “likely,” “outlook,” “forecast,” “would,” “could,” “should,” “can,” “will,” “project,” “intend,” “plan,” “goal,” “continue,” “sustain,” “synergy,” “on track,” “believe,” “seek,” “estimate,” “anticipate,” “may,” “possible,” “assume,” variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that could cause actual results to vary materially from those indicated, including:  risks that the proposed transactions disrupt plans and operations of either us or Alliance Boots, the ability to realize anticipated synergies and achieve anticipated financial results, the amount of costs, fees, expenses and charges incurred by Walgreens or Alliance Boots related to the transactions, the risks associated with international business operations, the risks associated with governance and control matters with respect to Alliance Boots,  whether the option to acquire the remainder of the Alliance Boots equity interest will be exercised, changes in vendor, payer and customer relationships and terms, changes in network participation, competition, changes in economic and business conditions generally or in the markets we or Alliance Boots participate, risks associated with new business initiatives and activities, the failure to obtain new contracts or extensions of existing contracts, the availability and cost of real estate and construction, risks associated with acquisitions, joint ventures, strategic investments  and divestitures, the ability to realize anticipated results from capital expenditures and cost reduction initiatives, outcomes of legal and regulatory matters, changes in legislation or regulations or interpretations thereof, and those described in Item 1A “Risk Factors” below and in other reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date the statement is made, whether as a result of new information, future events, changes in assumptions or otherwise.

Item 1A.                      Risk Factors
 
In addition to the other information in this report and our other filings with the SEC, you should carefully consider the risks described below, which 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.

We derive a significant portion of our sales from prescription drug sales reimbursed by pharmacy benefit management companies.

We derive a significant portion of our sales from prescription drug sales reimbursed through prescription drug plans administered by pharmacy benefit management (PBM) companies.  PBM companies typically administer multiple prescription drug plans that expire at various times and provide for varying reimbursement rates.  There can be no assurance that we will continue to participate in any particular pharmacy benefit manager network in any particular future time period.   If our participation in the prescription drug programs administered by one or more of the large PBM companies is restricted or terminated, we expect that our sales would be adversely affected, at least in the short term.  If we are unable to replace any such lost sales, either through an increase in other sales or through a resumption of participation in those plans, our operating results may be materially adversely affected.  For example, we were not part of the pharmacy provider network of Express Scripts, Inc., one of the largest PBMs, for more than eight months in 2012, which led most patients in plans administered by Express Scripts that we formerly served to transition to a new pharmacy and caused us to lose significant sales and adversely affected our operating results.  While we reached an agreement with Express Scripts in July 2012 and became part of the broadest network of pharmacies available to Express Scripts clients as of September 15, 2012, we expect the impact of this new agreement with Express Scripts to be incremental over time.  When we exit a pharmacy provider network and later resume network participation, there can be no assurance that we will achieve any particular level of business on any particular pace.  In addition, in such circumstances we may incur increased marketing and other costs in connection with initiatives to regain former patients and attract new patients covered by in-network plans. When we exit a pharmacy provider network and later resume network participation, there also can be no assurance that all clients of the PBM sponsor of the network will choose to include us again in their pharmacy network initially or at all.  For example, after we reached our agreement with Express Scripts, the United States Department of Defense TRICARE program, an Express Scripts client, announced that Walgreens would continue to be designated as a non-network pharmacy provider for TRICARE beneficiaries.

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 payers to reduce prescription drug costs and pharmacy reimbursement rates, as well as litigation relating to how drugs are priced, may adversely 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 (the DRA) sought to reduce federal spending by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs (AMP).  Those reductions did not go into effect.  The ACA, which was signed into law on March 23, 2010, enacted a modified reimbursement formula for multi-source drugs.  The modified formula, when implemented, is expected to reduce Medicaid reimbursements, which could adversely affect our revenues and profits.  There have also been a number of other recent proposals and enactments by the Federal government and various states to reduce Medicare Part D and Medicaid reimbursement levels in response to budget problems. We expect other similar proposals in the future.

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 materially 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 relatively lower sales revenues, but higher gross profit margins.  Accordingly, a decrease in the number of significant new brand name drugs or generics successfully introduced could adversely affect our results of operations.

Consolidation in the healthcare industry could adversely affect our business, financial condition and results of operations.  
 
Many organizations in the healthcare industry, including pharmacy benefit managers, have consolidated in recent years to create larger healthcare enterprises with greater bargaining power, which has resulted in greater pricing pressures.  For example, in April 2012 two of the three largest pharmacy benefit managers, Medco Health Solutions, Inc. and Express Scripts, Inc., merged.  The resulting entity is the largest pharmacy benefit manager in the United States.  If this consolidation trend continues, it could give the resulting enterprises even greater bargaining power, which may lead to further pressure on the prices for our products and services.  If these pressures result in reductions in our prices, our business will become less profitable unless we are able to achieve corresponding reductions in costs or develop profitable new revenue streams.  We expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements, and societal pressures will continue to cause the healthcare industry to evolve, potentially resulting in further business consolidations and alliances among the industry participants we engage with, which may adversely impact our business, financial condition and results of operations.

The anticipated strategic and financial benefits of our transaction with Alliance Boots may not be realized.

Walgreens and Alliance Boots entered into the Purchase and Option Agreement with the expectation that the transactions contemplated thereby would result in various benefits including, among other things, procurement cost savings and operating efficiencies, revenue synergies, innovation, sharing of best practices and a strengthened market position that may serve as a platform for future growth.  We currently anticipate that the transaction will be accretive to our earnings per share, excluding one-time transaction-related costs.  This expectation is based on our preliminary estimates, which may materially change.  The processes and initiatives needed to achieve these potential benefits are complex, costly and time-consuming, and we have not previously completed a transaction comparable in size or scope.  Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time.  Achieving the anticipated benefits of the Alliance Boots transaction is subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of geographically separate organizations, the possibility of faulty assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses or delays, and competitive factors in the marketplace.  In addition, there can be no assurance that we will decide to exercise the option to acquire the remaining 55% interest in Alliance Boots when we have the right to do so during a six-month period beginning 30 months after the initial closing. In the event that we do not exercise that option, under certain circumstances, our ownership interest in Alliance Boots would be reduced from 45% to 42% for nominal consideration to us. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues existing or arising with respect to the business of Alliance Boots or otherwise resulting from the transaction.  Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have a material adverse impact on our business, financial condition and results of operations and the price of our common stock.

Our strategic relationship with Alliance Boots significantly increases our exposure to the risks of operating internationally, including in Euro zone and neighboring countries.

Prior to our investment in Alliance Boots, substantially all of our operations were conducted within the United States and its territories. The transaction with Alliance Boots significantly increases the importance of international business to our future operations, growth and prospects.  A substantial portion of Alliance Boots revenues are generated in the Euro zone and neighboring countries.  Our investment in international business operations is subject to a number of risks, including:
 
·  
compliance with a wide variety of foreign laws and regulations, including retail and wholesale pharmacy, licensing, tax, foreign trade, intellectual property, privacy and data protection, currency, political and other business restrictions and requirements and local laws and regulations, whose interpretation and enforcement vary significantly among jurisdictions and can change significantly over time;
 
·  
additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption laws;
 
·  
potential difficulties in managing foreign operations, enforcing agreements and collecting receivables through foreign legal systems;
 
·  
tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries;
 
·  
potential adverse tax consequences, including tax withholding laws and policies and restrictions on  repatriation of funds to the United States;
 
·  
fluctuations in currency exchange rates, including uncertainty regarding the Euro;
 
·  
impact of recessions and economic slowdowns in economies outside the United States, including foreign currency devaluation, higher interest rates, inflation, and increased government regulation or ownership of  traditional private businesses; and
 
·  
the instability of foreign economies, governments and currencies and unexpected regulatory, economic or political changes in foreign markets.
 
We cannot assure you that one or more of these factors will not have a material adverse effect on our or Alliance Boots business, results of operation or financial condition.

From time to time, we make investments in companies over which we do not have sole control, including our investment in Alliance Boots. Some of these companies may operate in sectors that differ from our current operations and have different risks.

From time to time, we make debt or equity investments in other companies that we may not control or over which we may not have sole control.  For example, we currently own only 45% of the outstanding Alliance Boots equity interests.  While we have designees serving on the Alliance Boots Board of Directors and veto rights over certain significant Alliance Boots actions under the terms of our shareholder agreement with them, we do not have the ability to control day-to-day operations of that company.  Although Alliance Boots and other businesses in which we have made non-controlling investments generally have a significant health and daily living component, some of them operate in businesses that are different from our primary lines of business.  Investments in these businesses, among other risks, subject us to the operating and financial risks of the businesses we invest in and to the risk that we do not have sole control over the operations of these businesses.  From time to time, we may make additional investments in or acquire other entities that may subject us to similar risks.  Investments in entities over which we do not have sole control, including joint ventures and strategic alliances, present additional risks such as having differing objectives from our partners or the entities in which we invest, or becoming involved in disputes, or competing with those persons. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us.

Changes in economic conditions could adversely affect consumer buying practices and reduce our revenues and profitability.

Our performance has been, and may continue to be, adversely impacted by negative changes in national, regional or local economic conditions and consumer confidence.  The current economic environment has had a material impact on consumer behavior that could persist even as the economy starts to recover.  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 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 and negatively impact our profitability.  All these factors could impact our revenues, operating results and financial condition.

The industries in which we operate are highly competitive and further increases in competition could adversely affect us.

In our retail pharmacy business, we face intense competition from local, regional and national companies, including other drugstore chains, independent drugstores, 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 other markets in which we compete, including health and wellness services, we also operate in a highly competitive environment.  As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, this could require us to reevaluate our pricing structures to remain competitive.  Our failure to reduce prices could result in decreased revenue and negatively affect profits.

If the merchandise and services that we offer fail to meet customer needs, 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 needs and desires of our customers, whose preferences may change in the future.  It is difficult to predict consistently and successfully the products and services our customers will demand. 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. Failure to timely identify or effectively respond to changing consumer tastes, preferences and spending patterns could negatively affect our relationship with our customers, the demand for our products and services and our market share.

Our strategy is dependent, in part, upon the successful implementation of various strategic initiatives.
 
While our overall business strategy consists of many components and underlying initiatives, our long-term financial performance will be impacted by our ability to execute certain key initiatives.  In fiscal 2013, we plan to pursue strategies designed to further transform our traditional drugstore to a “retail health and daily living” store; advance community pharmacy to play a greater role in healthcare through integration and expanded services; deliver an outstanding customer experience through enhanced employee engagement; expand across new channels and markets; and enhance our cost structure through continuous improvement and innovation. If we are unable to effectively execute one or more of these key initiatives, our business, financial condition and results of operations may be materially adversely affected.
 
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.

A significant disruption in our computer systems could adversely affect our operations.

We rely extensively on our computer systems to manage our ordering, pricing, point-of-sale, inventory replenishment, customer loyalty program and other processes. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, natural disasters, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities.  In addition, we are currently making, and expect to continue to make, substantial investments in our information technology systems and infrastructure and any risk of system disruption is further increased when significant system changes are undertaken. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations.

Our growth strategy is partially dependent upon acquisitions, joint ventures and other strategic investments, some of which may not prove to be successful.

We have grown our business, in part, through acquisitions in recent years and expect to continue to acquire drugstore chains, independent drugstores, health and well-being businesses and other 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 or lines of business in which we have no or limited direct prior experience, the possible loss of key employees and customers and difficulties in achieving the synergies we anticipated.  These transactions 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 or investment, issue common stock that would dilute our current shareholders’ percentage ownership, or incur write-offs and restructuring and other related expenses.  Acquisitions, joint ventures and strategic investments involve numerous other risks, including potential exposure to unknown liabilities of acquired or investee companies.  In connection with acquisitions, joint ventures or strategic investments outside the United States, we may from time to time, in some instances enter into foreign currency contracts or other derivative instruments to hedge some or all of the foreign currency fluctuation risks, which subjects us to the risks associated with such derivative contracts and instruments.  No assurance can be given that our acquisitions, joint ventures and other strategic investments will be successful and will not materially adversely affect our business, financial condition or results of operations.

Changes in the health care regulatory environment may adversely affect our business.
 
Political, economic and regulatory influences are subjecting the healthcare industry to significant changes that could adversely affect our results of operations.  The ACA and the Health Care and Education Reconciliation Act of 2010 were signed into law on March 23, 2010 and March 30, 2010, respectively.  A number of the provisions of those laws require further rulemaking action by governmental agencies to implement, which has not yet occurred.  Future rulemaking could increase regulation of pharmacy services, result in changes to pharmacy reimbursement rates, and otherwise change the way we do business.  We cannot predict the timing or impact of any future rulemaking, but any such rulemaking could have an adverse impact on our results of operations.

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 and health and wellness 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; the ACA; 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; data privacy and security 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.

Should a product liability issue, recall or personal injury issue arise it may damage our reputation, which may result in a material adverse effect on our business and financial condition and adversely affect our ability to maintain adequate product or other liability insurance coverage.  If we fail or are unable to maintain adequate product or other liability insurance coverage for any reason it may also 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.
 
If we do not maintain the privacy and security of sensitive customer and business information, we could damage our reputation, incur substantial additional costs and become subject to litigation.

Throughout our operations, we receive, retain and transmit certain personal information that our customers provide to purchase products or services, enroll in promotional programs, participate in our customer loyalty program, register on our websites, or otherwise communicate and interact with us.  In addition, aspects of our operations depend upon the secure transmission of confidential information over public networks.  A compromise of our data security systems or those of businesses we interact with that results in information related to our customers or business being obtained by unauthorized persons could harm our reputation and expose us to regulatory actions and claims from customers, financial institutions, payment card associations and other persons, any of which could adversely affect our business, financial condition and results of operations.  In addition, a security breach could require that we expend additional resources related to the security of information systems and disrupt our business.  Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.  If we or those with whom we share information fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged and we could be subject to additional litigation and regulatory risks.

The Alliance Boots transaction reduced the percentage ownership interests of our current shareholders and the principal shareholders of Alliance Boots may have significant voting influence over matters requiring shareholder approval.

The principal shareholders of Alliance Boots, Stefano Pessina, Executive Chairman of Alliance Boots, and certain of his affiliates and affiliates of KKR & Co. L.P. (KKR), have the right to designate two members of our Board of Directors and are significant shareholders of our company.  In addition, if we elect to exercise the option to acquire the remaining 55% equity interest in Alliance Boots when we have the right to do so, we expect to issue approximately 144.3 million additional shares of our common stock, which amount is subject to adjustment in certain circumstances as described in the risk factor below. KKR and certain of its affiliates (the “KKR Investors”) and Mr. Pessina and certain of his affiliates (the “SP Investors”)  have agreed that, for so long as the SP Investors have the right to designate a person for service on our Board of Directors (or Mr. Pessina continues to serve as Executive Chairperson or Chief Executive Officer of Alliance Boots), and for so long as the KKR Investors have the right to designate a person for service on our Board, subject to certain exceptions, the SP Investors and the KKR Investors, as applicable, are obligated to vote all of their Company shares in accordance with the Board’s recommendation on matters submitted to a vote of our shareholders (including the election of directors).  These shareholders may be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, and this influence is expected to increase if we exercise the option and complete the second step transaction.

The amount and mix of consideration required to be paid by us upon the exercise of the option in the second step transaction is subject to adjustment in certain circumstances.

If the option to exercise the remaining 55% interest in Alliance Boots is exercised when we have the ability to do so, Walgreens expects to pay £3.133 billion (equivalent to approximately $5.0 billion based on exchange rates as of August 31, 2012) in cash and issue 144.3 million shares for the remaining interest in Alliance Boots, subject to the volume weighted average price of Walgreens common stock not being below $31.18 per share during a period shortly before the closing of the second step transaction.  However, if the volume weighted average price per share is below that level and the option is exercised, the difference in value would be made up by a cash payment or the issuance of additional shares of common stock at Walgreens election.  In addition, in certain circumstances after a change of control of Walgreens (as defined in the Purchase and Option Agreement), the selling shareholder of Alliance Boots  has the right to elect to receive all second step consideration in cash if the option to acquire the remaining 55% interest in Alliance Boots is exercised.  These provisions potentially could make the exercise of the second step option more costly or inadvisable by increasing the amount of cash and/or stock consideration we are required to pay.  If the amount of cash we are required to pay increases, the amount of indebtedness we incur also may increase, and if the amount of stock we are required to deliver increases, the percentage ownership interests of our existing shareholders would further decrease.

We share certain directors with Alliance Boots and certain of our officers serve on the Alliance Boots Board of Directors, which may give rise to conflicts of interest.

In connection with our initial 45% investment in Alliance Boots on August 2, 2012, four Walgreens executive officers, Gregory Wasson, President and Chief Executive Officer and a director of Walgreens, Wade Miquelon, Executive Vice President, Chief Financial Officer and President, International, Thomas J. Sabatino, Jr., Executive Vice President, General Counsel and Corporate Secretary, and Robert Zimmerman, Senior Vice President, International and International Chief Administration Officer, joined the Alliance Boots Board of Directors. In addition, Stefano Pessina, Executive Chairman of Alliance Boots, and Dominic Murphy, Director and Member of KKR, joined the Walgreens Board of Directors upon the closing. Mr. Pessina and his affiliates and KKR and its affiliates are significant shareholders of Alliance Boots.  These persons may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, while our contractual arrangements with Alliance Boots place restrictions on the parties’ conduct in various potential conflict situations and related party transactions are subject to review and approval by independent directors in accordance with the related party transaction approval  procedures described in our proxy statement, the potential for a conflict of interest exists when we on one hand, and Alliance Boots on the other hand, consider acquisitions and other corporate opportunities that may be suitable to Alliance Boots and us.  Conflicts may also arise if there are issues or disputes under the commercial arrangements that exist between Alliance Boots and us.

We have significant outstanding debt; our debt will increase if we incur additional debt in the future and do not retire existing debt, including if we decide to complete the second step transaction.

We have outstanding debt and other financial obligations and significant unused borrowing capacity. As of August 31, 2012, we had approximately $5.4 billion of outstanding indebtedness, including short-term borrowing.  Our indebtedness increased on September 13, 2012, when we completed the issuance and sale of $4.0 billion aggregate principal amount of senior unsecured notes of varying maturities, approximately $3.0 billion of which was used to refinance existing indebtedness.  In addition, if we exercise the call option and consummate the second step transaction, we are likely to incur significant additional debt in connection with the financing thereof and the assumption of the Alliance Boots debt then outstanding. Our debt level and related debt service obligations could have negative consequences, including:

·  
requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we have available for other purposes, such as capital expenditures, acquisitions or dividends to shareholders;
·  
reducing our flexibility in planning for or reacting to changes in our business and market conditions; and
·  
exposing us to interest rate risk since a portion of our debt obligations is at variable rates.
 
 
We may incur or assume significantly more debt in the future, including, but not limited to, in connection with the second step transaction. If we add new debt and do not retire existing debt, the risks described above could increase.

Our long-term debt obligations include covenants that may adversely affect our ability to incur certain secured indebtedness or engage in certain types of sale and leaseback transactions. Our ability to comply with these restrictions and covenants may be affected by events beyond our control. If we breach any of these restrictions or covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable. Alliance Boots GmbH and its subsidiaries are not subsidiaries of Walgreens and therefore are not subject to these restrictions and covenants.

Our credit ratings are important to our business.
 
The major credit rating agencies have assigned us and our corporate debt investment grade credit ratings.  These ratings are based on a number of factors, which include their assessment of our financial strength and financial policies.  We aim to maintain investment grade 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.  However, there can be no assurance that any particular rating assigned to us will remain in effect for any given period of time or that a rating will not be changed or withdrawn by a rating agency, if in that rating agency’s judgment, future circumstances relating to the basis of the rating so warrant.  Incurrence of additional debt by Alliance Boots or us could adversely affect our credit ratings.  Any downgrade of our credit ratings could adversely affect our cost of funds, liquidity, competitive position and access to capital markets.

Our quarterly results may fluctuate significantly.

Our operating results have historically varied on a quarterly basis and may continue to fluctuate significantly in the future. Factors that may affect our quarterly operating results include, but are not limited to, seasonality, the timing of the introduction of new generic and brand name prescription drugs, the timing and severity of the cough, cold and flu season, significant acquisitions, dispositions and other strategic initiatives, the relative magnitude of our LIFO provision in any particular quarter, inflation and the other risk factors discussed under this Item 1A.  Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and investors should not rely on the results of any particular quarter as an indication of our future performance.

There are a number of additional business risks that could adversely affect our financial results.

Many other factors could adversely affect our financial results, including:

·  
If we are unsuccessful in establishing effective advertising, marketing and promotional programs, our sales or sales margins could be negatively affected.

·  
Our success depends on our continued ability to attract and retain store and management and professional personnel, and the loss of key personnel could have an adverse effect on the results of our operations, financial condition or cash flow.

·  
Changes in accounting standards and the application of existing accounting standards particularly related to the measurement of fair value as compared to carrying value for the Company’s reporting units, including goodwill and intangible assets, may have an adverse effect on the Company’s financial condition and results of operations.

·  
Natural disasters, severe weather conditions, terrorist activities, global political and economic developments, war, 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.

·  
The long-term effects of climate change on general economic conditions and the pharmacy industry in particular are unclear, and changes in the supply, demand or available sources of energy and the regulatory and other costs associated with energy production and delivery may affect the availability or cost of goods and services, including natural resources, necessary to run our business.

·  
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.

Item 2.  Properties

The Company's locations by state at August 31, 2012 and 2011 are listed below.

State
 
2012
   
2011
 
State
 
2012
   
2011
 
State
 
2012
   
2011
 
Alabama
    106       101  
Louisiana
    151       147  
Oklahoma
    104       105  
Alaska
    5       5  
Maine
    15       14  
Oregon
    76       73  
Arizona
    254       254  
Maryland
    73       66  
Pennsylvania
    138       138  
Arkansas
    60       60  
Massachusetts
    179       180  
Rhode Island
    29       29  
California
    651       627  
Michigan
    233       230  
South Carolina
    114       110  
Colorado
    170       167  
Minnesota
    160       156  
South Dakota
    14       14  
Connecticut
    119       117  
Mississippi
    71       71  
Tennessee
    268       261  
Delaware
    68       67  
Missouri
    204       201  
Texas
    718       700  
District of Columbia
    5       3  
Montana
    14       13  
Utah
    44       43  
Florida
    878       864  
Nebraska
    62       61  
Vermont
    4       4  
Georgia
    204       203  
Nevada
    92       87  
Virginia
    143       133  
Hawaii
    13       11  
New Hampshire
    35       35  
Washington
    137       130  
Idaho
    41       42  
New Jersey
    205       199  
West Virginia
    22       21  
Illinois
    610       598  
New Mexico
    66       66  
Wisconsin
    234       231  
Indiana
    216       211  
New York
    526       524  
Wyoming
    11       11  
Iowa
    73       72  
North Carolina
    211       201  
Guam
    1       1  
Kansas
    71       69  
North Dakota
    1       1  
Puerto Rico
    113       110  
Kentucky
    103       102  
Ohio
    270       271  
TOTAL
    8,385       8,210  

The Company owns approximately 20% of the retail drugstore locations open at August 31, 2012. The remaining drugstore locations are leased. The leases are for various terms and periods. See Note 3, "Leases" on page 32 of the 2012 Annual Report, which section is incorporated herein by reference. The Company has a strategic expansion program of adding new stores and remodeling and relocating existing stores. Net retail selling space increased from 86 million square feet at August 31, 2011 to 87 million square feet at August 31, 2012. Not including the approximately 5,000 locations that were converted under the Customer Centric Retailing initiative concluded in fiscal 2012, approximately 28% of Company stores have been opened or remodeled during the past five years. As of August 31, 2012, we had opened or converted stores with our pilot “Well Experience” store format in approximately 350 locations, including a market-wide transformation in the Indianapolis area and new flagship stores in select markets including Chicago, New York City, Las Vegas and Puerto Rico.

The Company's retail store operations are supported by 18 major distribution centers with a total of approximately 10 million square feet of space, of which 15 locations are 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.

The Company operates 31 principal office facilities containing approximately three million square feet, of which 18 locations are owned. The Company operates two mail service facilities containing approximately 237 thousand square feet, one of which is owned.

The Company also owns 32 strip shopping malls containing approximately 2 million square feet.

The foregoing does not include properties acquired in connection with the USA Drug transaction, which closed in September 2012. It also does not include properties of unconsolidated partially owned entities, such as Alliance Boots GmbH, of which we own 45% of the outstanding share capital.

Item 3.  Legal Proceedings

The information in response to this item is incorporated herein by reference to Note 11 "Commitments and Contingencies" on pages 37 through 38 of the 2012 Annual Report.

Item 4.   Mine Safety Disclosures
Not Applicable.

Executive Officers of the Registrant

The following table sets forth, for each person serving as an executive officer of Walgreens as of October 19, 2012, the name, age and principal occupations and employment of such person for the past five years. Unless otherwise stated, employment is by Walgreens. Executive officers of Walgreens are elected annually by the Board of Directors and serve until a successor has been duly elected or appointed and qualified or until the officer's death, resignation or removal. There are no family relationships between any of the Company’s executive officers or directors.

Name and Business Experience
 
Age
Office(s) Held
         
Gregory D. Wasson
 
54
President and Chief Executive Officer
 
President and Chief Executive Officer since February 2009
     
 
Director since February 2009
     
 
President and Chief Operating Officer – May 2007 to February 2009
     
 
Executive Vice President – October 2005 to May 2007
     
 
President, Walgreens Health Services – March 2002 to May 2007
Director of Alliance Boots GmbH since August 2012
     
         
Sona Chawla
 
45
President, E-Commerce
 
President, E-Commerce since January 2011
     
 
Senior Vice President, E-Commerce –  July 2008 to January 2011
     
 
Vice President, Global Online Business, Dell, Inc. –  December 2006 to May 2008
     
         
Kermit R. Crawford
 
53
President, Pharmacy, Health and Wellness Services and Solutions
 
 
President, Pharmacy, Health and Wellness Services and Solutions since September 2010
       
 
Executive Vice President  – January 2010 to September 2010
       
 
Senior Vice President - October 2007 to January 2010
       
 
Vice President – October 2005 to October 2007
       
 
Senior Vice President, Walgreens Health Services – October 2005 to September 2007
       
         
Joseph C. Magnacca
 
50
President, Daily Living Products and Solutions
 
 
President, Daily Living Products and Solutions since April 2011
       
 
President of Duane Reade Holdings, Inc. –  July 2010 to April 2011
       
 
Senior Vice President and Chief Merchandising Officer of Duane Reade Holdings, Inc. – September 2008 to July 2010
       
 
Executive Vice President of Shoppers Drug Mart Corporation – 2001 to 2008
       
         
Wade D. Miquelon
 
47
Executive Vice President and Chief Financial Officer and President, International
 
 
President, International since October 2012
       
 
Executive Vice President and Chief Financial Officer since July 2009
   
 
 
 
Senior Vice President and Chief Financial Officer – June 2008 to July 2009
       
 
Executive Vice President and Chief Financial Officer, Tyson Foods, Inc. – June 2006 to June 2008
       
 
Director of Alliance Boots GmbH since August 2012
       
         
Mark A. Wagner
 
51
President, Community Management
 
 
President, Community Management since September 2010
       
 
Executive Vice President – March 2006 to September 2010
       
         
Thomas J. Sabatino, Jr.
 
53
Executive Vice President, General Counsel and Corporate Secretary
 
 
Executive Vice President, General Counsel and Corporate Secretary since  September 2011
       
 
Executive Vice President and General Counsel of UAL Corporation and United Air Lines, Inc. – March 2010 to December 2010
       
 
Executive Vice President and General Counsel of Schering- Plough Corporation – April 2004 to November 2009
Director of Alliance Boots GmbH since August 2012
       
           
Graham W. Atkinson
 
61
Senior Vice President and Chief Marketing and Customer Experience Officer
 
 
Senior Vice President and Chief Marketing and Customer Experience Officer since October 2012
       
 
Senior Vice President and Chief Customer Experience Officer – January 2011 to October 2012
       
 
Executive Vice President of UAL Corporation and United Air Lines, Inc. and President of Mileage Plus frequent flyer program – October 2008 to December 2010
       
 
Executive Vice President – Chief Customer Officer of UAL Corporation and United Air Lines, Inc. – September 2006 to September 2008
       
           
 Bradley M. Fluegel  
51
 Senior Vice President and Chief Strategy Officer  
  Senior Vice President and Chief Strategy Officer since October 2012        
 
Executive in Residence at Health Evolution Partners – April 2011 to September 2012
       
 
Executive Vice President and Chief Strategy and External Affairs Officer of Wellpoint, Inc. – September 2007 to December 2010
       
     
       
Mia M. Scholz
 
46
Senior Vice President - Corporate Financial Operations, Controller and Chief Accounting Officer
 
 
Senior Vice President - Corporate Financial Operations since October 2012
       
 
Senior Vice President since January 2011
       
 
Vice President since October 2007
       
 
Controller and Chief Accounting Officer since January 2004
       
 
Divisional Vice President – January 2004 to October 2007
       
         
Timothy J. Theriault
 
52
Senior Vice President and Chief Information Officer
 
 
Senior Vice President and Chief Information Officer since October 2009
   
 
 
 
President, Corporate and Institutional Services, Northern Trust Corporation – January 2006 to October 2009
       
           
Kathleen Wilson-Thompson
 
55
Senior Vice President and Chief Human Resources Officer
 
 
Senior Vice President and Chief Human Resources Officer since January 2010
   
 
 
 
Senior Vice President, Global Human Resources of Kellogg Company – July 2005 to December 2009
       
           
Robert G. Zimmerman
 
60
Senior Vice President, International and International Chief Administration Officer
 
 
Senior Vice President, International and International Chief Administration Officer since October 2012
       
 
Senior Vice President and Chief Strategy Officer – September 2011 to September 2012
       
 
Senior Vice President since January 2011
       
 
Vice President – September 2007 to January 2011
       
 
Vice President and Chief Financial Officer, Walgreens Health Services – September 2001 to September 2007
       
   Director of Alliance Boots GmbH since August 2012        
         
W. Bryan Pugh
 
49
Vice President, Merchandising
 
 
Vice President, Merchandising since February 2009
       
 
Chief Retail Operations Officer, Fresh & Easy Neighborhood Markets, USA, Tesco PLC – March 2005 to December 2008
       



PART II

 
 
Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
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 August 31, 2012, there were approximately 81,446 holders of record of Company common stock.

The range of the sales prices of the Company's common stock by quarters during the years ended August 31, 2012 and August 31, 2011 are incorporated herein by reference to the caption “Common Stock Prices” on page 41 of the 2012 Annual Report.

The Company's cash dividends per common share declared during the two fiscal years ended August 31 are as follows:

Quarter Ended
 
2012
   
2011
 
November
  $ .225     $ .175  
February
    .225       .175  
May
    .225       .175  
August
    .275       .225  
Fiscal Year
  $ .950     $ .750  

The Company has paid cash dividends every quarter since 1933. Future dividends will be determined based on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors.

The following table provides information about purchases by the Company during the quarter ended August 31, 2012 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act. Subject to applicable law, share purchases may be made in open market transactions, privately negotiated transactions, or pursuant to instruments and plans complying with Rule 10b5-1.

Issuer Purchases of Equity Securities
 
                         
Period
 
Total Number of Shares Purchased (1)
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Repurchase Programs (2)
   
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
 
6/01/2012 - 6/30/2012
    3,711     $ 31.62       -       425,062,173  
7/01/2012 - 7/31/2012
    1,617       30.09       -       425,062,173  
8/01/2012 - 8/31/2012
    5,735       35.81       -       425,062,173  
Total
    11,063     $ 33.56       -          

(1)
The Company purchased 11,063 shares of its common stock in open-market transactions to satisfy the requirements of the Company's employee stock purchase and option plans, as well as the Company's Nonemployee Director Stock Plan.
(2)
On July 13, 2011, the Board of Directors approved a share repurchase program (2012 repurchase program) that allows for the repurchase of up to $2.0 billion of the Company’s common stock prior to its expiration on December 31, 2015.  The total remaining authorization under the 2012 repurchase program was $425 million as of August 31, 2012.
 
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 2012 Annual Report.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

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 25 of the 2012 Annual Report.

Item 7A.  Qualitative and Quantitative Disclosures about Market Risk

We are exposed to interest rate volatility with regard to future issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include U.S. Treasury rates, LIBOR, and commercial paper rates. From time to time, we use interest rate swaps and forward-starting interest rate swaps to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed upon notional principal amount.

In January 2010, we entered into two interest rate swap transactions converting our $1.3 billion 4.875% fixed rate notes to a floating interest rate based on the six month LIBOR in arrears plus a constant spread. In May 2011, we entered into two additional interest rate swap transactions converting $250 million 5.25% fixed rate notes to a floating interest rate based on the six month LIBOR in arrears plus a constant spread. In March 2012, the Company entered into interest rate swaps with the same two counterparties converting an additional $250 million of its 5.25% fixed rate notes to a floating interest rate based on the one-month LIBOR in arrears plus a constant spread. All swap termination dates coincide with the respective note maturity dates.

In July 2012, the Company entered into a forward starting interest rate swap with two counterparties locking in the then current interest rate on $350 million of its anticipated debt issuance in connection with the Alliance Boots transaction. In August 2012, two additional swaps totaling $650 million were entered into with four different counterparties, hedging the same anticipated debt instrument, for a total of $1.0 billion. In September 2012, the Company issued $4.0 billion in notes, which terminated all forward starting interest rate swaps. The proceeds and gains resulting from the swaps were immaterial.

These financial instruments are sensitive to changes in interest rates. On August 31, 2012, we had $4.8 billion in long-term debt obligations that had floating interest rates. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense by approximately $48 million. In conjunction with the September 2012 notes issuance we refinanced $3.0 billion of the $4.8 billion outstanding floating rate long-term debt at August 31, 2012. This refinancing included $550 million of floating rate notes which accrue interest at the rate equal to the three-month U.S. dollar LIBOR as determined at the beginning of each quarterly period, plus 0.500%. The remaining notes that were part of the refinancing were at fixed rates. A one percentage point increase or decrease in the three-month U.S. dollar LIBOR would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense on these floating rate notes by approximately $6 million.

In connection with our Purchase and Option Agreement with Alliance Boots and the transactions contemplated thereby, our exposure to foreign currency risks, primarily with respect to the British pound sterling, and to a lesser extent the Euro and certain other foreign currencies, is expected to increase.  We are exposed to the translation of foreign currency earnings to the U.S. dollar as a result of our 45% interest in Alliance Boots GmbH, which we account for using the equity method of accounting on a one month lag.   Foreign currency forward contracts and other derivative instruments may be used from time to time in some instances to hedge in full or in part certain risks relating to foreign currency denominated assets and liabilities, intercompany transactions, and in connection with acquisitions, joint ventures or investments outside the United States.  As of August 31, 2012 and August 31, 2011, we did not have any outstanding foreign exchange derivative instruments.
 
Item 8.  Financial Statements and Supplementary Data
See Item 15.
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures

Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Report on Internal Control Over Financial Reporting
 
Management's report on internal control over financial reporting and the report of Deloitte & Touche LLP, the Company's independent registered public accounting firm, related to their assessment of the effectiveness of internal control over financial reporting are included in our fiscal 2012 Annual Report and are incorporated in this Item 9A by reference.

Changes in Internal Control over Financial Reporting

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 CEO and CFO, no changes during the quarter ended August 31, 2012 were identified that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
Item 9B.  Other Information
None.


PART III
 
Item 10.  Directors, Executive Officers and Corporate Governance
The information required by Item 10, with the exception of the information relating to the executive officers of the Company, which is presented in Part I above under the heading "Executive Officers of the Registrant," is incorporated herein by reference to the following sections of the Company's 2012 Proxy Statement:  Proposal 1, Election of Directors; The Board of Directors, Board Committees and Corporate Governance; and Section 16(a) Beneficial Ownership Reporting Compliance.

The Company has adopted a Code of Business Conduct applicable to all employees, officers and directors that incorporates policies and guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. 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 Business Conduct and the Code of Ethics for Financial Executives is available at the Company's website, investor.walgreens.com. The Company intends to promptly disclose on its website in accordance with SEC rules changes to or waivers, if any, of the Code of Ethics for Financial Executives or the Code of Business Conduct for directors and executive officers.

Charters of all committees of the Company's Board of Directors, as well as the Company's Corporate Governance Guidelines and Code of Business Conduct, 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 #1833, 108 Wilmot Road, Deerfield, Illinois 60015.
 
Item 11.  Executive Compensation
The information required by Item 11 is incorporated herein by reference to the following sections of the Company's 2012 Proxy Statement: Director Compensation; and Executive Compensation.
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is incorporated herein by reference to the following sections of the Company's 2012 Proxy Statement: Security Ownership of Certain Beneficial Owners and Management; and Equity Compensation Plans.
 
Item 13.  Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is incorporated herein by reference to the following sections of the Company's 2012 Proxy Statement: Certain Relationships and Related Party Transactions; and The Board of Directors, Board Committees and Corporate Governance.
 
Item 14.  Principal Accounting Fees and Services
The information required by Item 14 is incorporated herein by reference to the following sections of the Company's 2012 Proxy Statement: Independent Registered Public Accounting Firm Fees and Services.


PART IV
 
Item 15.  Exhibits and Financial Statement Schedules

 
(a)
Documents filed as part of this report:

 
(1)
Financial statements. The following financial statements, supplementary data, and report of independent public accountants appearing in the 2012 Annual Report are incorporated herein by reference.
 
 
2012 Annual Report Page Number (printed)
Consolidated Statements of Comprehensive Income and Shareholders' Equity for the years ended August 31, 2012, 2011 and 2010
 
26 – 27
Consolidated Balance Sheets at August 31, 2012 and 2011
 
28
Consolidated Statements of Cash Flows for the years ended August 31, 2012, 2011 and 2010
 
29
Notes to Consolidated Financial Statements
 
30 – 42
Management's Report on Internal Control
 
43
Report of Independent Registered Public Accounting Firm
 
43
 
 
(2)
Financial statement schedules and supplementary information. The following financial statement schedule and related report of the independent registered public accounting firm is included herein.

   
Schedule II    Valuation and Qualifying Accounts
 
Report of Independent Registered Public Accounting Firm
 

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.

Alliance Boots GmbH
 
 
Since August 2, 2012, we have had an investment in Alliance Boots GmbH that we account for using the equity method of accounting.  SEC Rule 3-09 of Regulation S-X requires that we include or incorporate by reference Alliance Boots GmbH financial statements in this Annual Report on Form 10-K since our investment was considered to be significant in the context of Rule 3-09 for the year ended August 31, 2012. Alliance Boots GmbH audited consolidated financial statements for the years ended March 31, 2012, 2011 and 2010 are filed as Exhibit 99.1 hereto and incorporated herein by reference. We plan to file with the SEC on or before September 30, 2013 the audited consolidated financial statements of Alliance Boots GmbH as of and for the years ended March 31, 2013 and 2012.
 
 
(3)
Exhibits. Exhibits 10.1 through 10.58 constitute management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of this Form 10-K.

The agreements included as exhibits to this report are included to provide information regarding their terms and not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other parties to the applicable agreement, and:

•   should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

•   may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

•   may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

•   were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

(b)           Exhibits


Exhibit No.
 
Description
SEC Document Reference
  2.1 *
Purchase and Option Agreement by and among Walgreen Co., Alliance Boots GmbH  and AB Acquisitions Holdings Limited dated June 18, 2012  and related annexes
Incorporated by reference to Exhibit 2.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on June 19, 2012.
         
  3.1  
Amended and Restated Articles of Incorporation of Walgreen Co.
Incorporated by reference to Exhibit 3.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 19, 2011.
         
  3.2  
Amended and Restated By-Laws of Walgreen Co., as amended effective as of August 2, 2012.
Incorporated by reference to Exhibit 3.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 6, 2012.
         
  4.1 **
Form of Indenture between Walgreen Co. and Wells Fargo Bank, National Association.
Incorporated by reference to Exhibit 4.1 to Walgreen Co.’s registration statement on Form S-3ASR (File No. 333-152315) filed with the SEC on July 14, 2008.
         
  4.2  
Form of 4.875% Note due 2013.
Incorporated by reference to Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on July 17, 2008.
         
  4.3  
Form of 5.25% Note due 2019.
Incorporated by reference to Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 13, 2009.
         
  4.4  
Form of Floating Rate Note due 2014.
Incorporated by reference to Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on September 13, 2012.
         
  4.5  
Form of 1.000% Note due 2015.
Incorporated by reference to Exhibit 4.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on September 13, 2012.
         
  4.6  
Form of 1.800% Note due 2017.
Incorporated by reference to Exhibit 4.3 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on September 13, 2012.
         
  4.7  
Form of 3.100% Note due 2022.
Incorporated by reference to Exhibit 4.4 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on September 13, 2012.
         
  4.8  
Form of 4.400% Note due 2042.
Incorporated by reference to Exhibit 4.5 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on September 13, 2012.
         
  4.9  
Shareholders Agreement, dated as of August 2, 2012, among Walgreen Co., Stefano Pessina, KKR Sprint (European II) Limited, KKR Sprint (2006) Limited and KKR Sprint (KPE) Limited, Alliance Santé Participations S.A., Kohlberg Kravis Roberts & Co. L.P. and certain other investors party thereto
Incorporated by reference to Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 6, 2012.
         
  10.1  
Walgreen Co. Management Incentive Plan (as amended and restated effective September 1, 2008).
Incorporated by reference to Exhibit 10.3 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604).
         
  10.2  
Walgreen Co. 2011 Cash-Based Incentive Plan.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 17, 2012.
         
  10.3  
Walgreen Co. Long-Term Performance Incentive Plan (amendment and restatement of the Walgreen Co. Restricted Performance Share Plan).
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 11, 2007.
         
  10.4  
Walgreen Co. Long-Term Performance Incentive Plan Amendment No. 1 (effective January 10, 2007).
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007 (File No. 1-00604).
         
  10.5  
Walgreen Co. Long-Term Performance Incentive Plan Amendment No. 2.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on April 14, 2011.
         
  10.6  
Form of Restricted Stock Unit Award Agreement (August 15, 2011 grants).
Incorporated by reference to Exhibit 10.5 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2011 (File No. 1-00604).
         
  10.7  
Form of Restricted Stock Unit Award Agreement (effective November 1, 2012).
Filed herewith.
         
  10.8  
Form of Performance Share Contingent Award Agreement (effective September 1, 2008).
Incorporated by reference to Exhibit 10.14 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604).
         
  10.9  
Form of Performance Share Contingent Award Agreement (effective September 1, 2011).
Incorporated by reference to Exhibit 10.8 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2011 (File No. 1-00604).
         
  10.10  
Form of Restricted Stock Award Agreement (effective June 2008).
Incorporated by reference to Exhibit 10.15 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604).
         
  10.11  
Walgreen Co. Executive Stock Option Plan (as amended and restated effective January 13, 2010).
Incorporated by reference to Exhibit 99.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 20, 2010.
         
  10.12  
Form of Stock Option Agreement (Benefit Indicator 512 - 515) (effective September 1, 2011).
Incorporated by reference to Exhibit 10.11 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2011 (File No. 1-00604).
         
  10.13  
Form of Stock Option Agreement (Benefit Indicator 516 and above) (effective September 1, 2011).
Incorporated by reference to Exhibit 10.12 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2011 (File No. 1-00604).
         
  10.14  
Walgreen Co. 1986 Executive Deferred Compensation/Capital Accumulation Plan.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1986 (File No. 1-00604).
         
  10.15  
Walgreen Co. 1988 Executive Deferred Compensation/Capital Accumulation Plan.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1987 (File No. 1-00604).
         
  10.16  
Amendments to Walgreen Co. 1986 and 1988 Executive Deferred Compensation/ Capital Accumulation Plans.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1988 (File No. 1-00604).
         
  10.17  
Walgreen Co. 1992 Executive Deferred Compensation/Capital Accumulation Plan Series 1.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1992 (File No. 1-00604).
         
  10.18  
Walgreen Co. 1992 Executive Deferred Compensation/Capital Accumulation Plan Series 2.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1992 (File No. 1-00604).
         
  10.19  
Walgreen Co. 1997 Executive Deferred Compensation/Capital Accumulation Plan Series 1.
Incorporated by reference to Exhibit 10(c) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1997 (File No. 1-00604).
         
  10.20  
Walgreen Co. 1997 Executive Deferred Compensation/Capital Accumulation Plan Series 2.
Incorporated by reference to Exhibit 10(d) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1997 (File No. 1-00604).
         
  10.21  
Walgreen Co. 2001 Executive Deferred Compensation/Capital Accumulation Plan.
Incorporated by reference to Exhibit 10(g) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001 (File No. 1-00604).
         
  10.22  
Walgreen Co. 2002 Executive Deferred Compensation/Capital Accumulation Plan.
Incorporated by reference to Exhibit 10(g) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2002 (File No. 1-00604).
         
  10.23  
Amendment to the Walgreen Co. 1986, 1988, 1992 (Series 1), 1992 (Series 2), 1997 (Series 1), 1997 (Series 2), 2001 and 2002 Executive Deferred Compensation/ Capital Accumulation Plans.
Incorporated by reference to Exhibit 10.3 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2009 (File No. 1-00604).
         
  10.24  
Walgreen Co. 2006 Executive Deferred Compensation/Capital Accumulation Plan (effective January 1, 2006).
Incorporated by reference to Exhibit 10(b) to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2005 (File No. 1-00604).
         
  10.25  
Walgreen Co. 2011 Executive Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 12, 2010.
         
  10.26  
Amendment No. 1 to the Walgreen Co. 2011 Executive Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 19, 2011.
         
  10.27  
Walgreen Co. Executive Deferred Profit-Sharing Plan, as amended and restated effective January 1, 2012.
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on July 15, 2011.
         
  10.28  
Share Walgreens Stock Purchase/Option Plan (effective October 1, 1992), as amended.
Incorporated by reference to Exhibit 10(d) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003 (File No. 1-00604).
         
  10.29  
Share Walgreens Stock Purchase/Option Plan Amendment No. 4 (effective July 15, 2005), as amended.
Incorporated by reference to Exhibit 10(h)(ii) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005 (File No. 1-00604).
         
  10.30  
Share Walgreens Stock Purchase/Option Plan Amendment No. 5 (effective October 11, 2006).
Incorporated by reference to Exhibit 10(b) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604).
         
  10.31  
Walgreen Select Senior Executive Retiree Medical Expense Plan.
Incorporated by reference to Exhibit 10(j) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1996 (File No. 1-00604).
         
  10.32  
Walgreen Select Senior Executive Retiree Medical Expense Plan Amendment No. 1 (effective August 1, 2002).
Incorporated by reference to Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003 (File No. 1-00604).
         
  10.33  
Walgreen Co. Profit-Sharing Restoration Plan (as restated effective January 1, 2003).
Incorporated by reference to Exhibit 10(b) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2003 (File No. 1-00604).
         
  10.34  
Walgreen Co. Profit-Sharing Restoration Plan Amendment No. 1 (effective January 1, 2008).
Incorporated by reference to Exhibit 10.36 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604).
         
  10.35  
Walgreen Co. Profit-Sharing Restoration Plan Amendment No. 2 (effective January 1, 2010).
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2010 (File No. 1-00604).
         
  10.36  
Amendment to the Walgreen Co. Profit-Sharing Restoration Plan.
Incorporated by reference to Exhibit 10.3 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2010 (File No. 1-00604).
         
  10.37  
Amendment to the Walgreen Co. Profit-Sharing Restoration Plan.
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 19, 2011.
         
  10.38  
Amendment to the Walgreen Co. Profit-Sharing Restoration Plan.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on April 13, 2012.
         
  10.39  
Walgreen Co. 162(m) Deferred Compensation Plan, as amended and restated.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on October 17, 2011.
         
  10.40  
Walgreen Co. Nonemployee Director Stock Plan, as amended and restated (effective January 14, 2004).
Incorporated by reference to Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 (File No. 1-00604).
         
  10.41  
Walgreen Co. Nonemployee Director Stock Plan Amendment No. 1 (effective October 12, 2005).
Incorporated by reference to Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2005 (File No. 1-00604).
         
  10.42  
Walgreen Co. Nonemployee Director Stock Plan Amendment No. 2 (effective October 11, 2006).
Incorporated by reference to Exhibit 10(f) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604).
         
  10.43  
Walgreen Co. Nonemployee Director Stock Plan Amendment No. 3 (effective September 1, 2009).
Incorporated by reference to Exhibit 10.43 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010 (File No. 1-00604).
         
  10.44  
Walgreen Co. Broad-Based Stock Option Plan (effective July 10, 2002).
Incorporated by reference to Exhibit 10(p) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2002 (File No. 1-00604).
         
  10.45  
Walgreen Co. Broad-Based Employee Stock Option Plan Amendment No. 1 (effective April 1, 2003).
Incorporated by reference to Exhibit 10(c) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2003 (File No. 1-00604).
         
  10.46  
Walgreen Co. Broad-Based Employee Stock Option Plan Amendment No. 2 (effective October 11, 2006).
Incorporated by reference to Exhibit 10(e) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604).
         
  10.47  
Form of Change of Control Employment Agreements.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Current Report on Form 8-K dated October 18, 1988 (File No. 1-00604).
         
  10.48  
Form of Amendment to Change of Control Employment Agreements (effective January 1, 2009).
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2009 (File No. 1-00604).
         
  10.49  
Amendment to Employment Agreements adopted July 12, 1989.
Incorporated by reference to Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1989 (File No. 1-00604).
         
  10.50  
Walgreen Co. Executive Severance and Change in Control Plan effective January 1, 2013
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on July 16, 2012.
         
  10.51  
Executive Stock Option Plan – Stock Option Agreement made as of October 10, 2008 between Alan G. McNally and Walgreen Co.
Incorporated by reference to Exhibit 10.8 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008 (File No. 1-00604).
         
  10.52  
Long-Term Performance Incentive Plan – Restricted Stock Unit Award Agreement made as of October 10, 2008 between Alan G. McNally and Walgreen Co.
Incorporated by reference to Exhibit 10.9 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008 (File No. 1-00604).
         
  10.53  
Agreement and Release between Hal F. Rosenbluth and Walgreen Co.
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2011 (File No. 1-00604).
         
  10.54  
Separation Agreement and Release Agreement between Kimberly L. Feil and Walgreen Co.
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2011 (File No. 1-00604).
         
  10.55  
Offer letter agreement dated March 10, 2011 between Joseph C. Magnacca and Walgreen Co.
Incorporated by reference to Exhibit 10.3 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2011 (File No. 1-00604).
         
  10.56  
Offer letter agreement dated August 9, 2011 between Thomas J. Sabatino and Walgreen Co.
Incorporated by reference to Exhibit 10.55 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2011 (File No. 1-00604).
         
  10.57  
drugstore.com, inc., 1998 Stock Plan, as amended.
Incorporated by reference to Exhibit 99.1 to Walgreen Co.’s Registration Statement on Form S-8 (File No. 333-174811) filed with the SEC on June 9, 2011.
         
  10.58  
drugstore.com, inc., 2008 Equity Incentive Plan, as amended.
Incorporated by reference to Exhibit 99.2 to Walgreen Co.’s Registration Statement on Form S-8 (File No. 333-174811) filed with the SEC on June 9, 2011.
         
  10.59  
364-Day Bridge Term Loan Agreement, dated as of July 23, 2012, among Walgreen Co., the lenders party thereto, and Goldman Sachs Bank USA, as administrative agent
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on July 26, 2012.
         
  10.60  
Credit Agreement, dated as of July 23, 2012, among Walgreen Co., the lenders party thereto, Bank of America, N.A., as administrative agent and a letter of credit issuer, and Wells Fargo Bank, National Association, as a letter of credit issuer
 
Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on July 26, 2012.
         
  10.61  
Second Amendment to Credit Agreement, dated as of July 23, 2012, by and among Walgreen Co., the lenders party thereto, Bank of America, N.A., as administrative agent and a letter of credit issuer and Wells Fargo Bank, National Association, as a letter of credit issuer (including the Credit Agreement, dated as of July 20, 2011, as amended by such Second Amendment to Credit Agreement, as an exhibit thereto)
Incorporated by reference to Exhibit 10.3 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on July 26, 2012.
         
  10.62  
Shareholders’ Agreement, dated as of August 2, 2012, by and among Alliance Boots GmbH, AB Acquisition Holdings Limited and Walgreen Co.
Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 6, 2012.
         
  12.  
Computation of Ratio of Earnings to Fixed Charges.
Filed herewith.
         
  13.  
Portions of the Walgreen Co. Annual Report to Shareholders for the fiscal year ended August 31, 2012.
This report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is being furnished for the information of the SEC and is not deemed to be "filed" as a part of the filing of this Form 10-K.
         
  21.  
Subsidiaries of the Registrant.
Filed herewith.
         
  23.  
Consent of Independent Registered Public Accounting Firm.
Filed herewith.
         
  31.1  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
         
  31.2  
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
         
  32.1  
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
Furnished herewith.
         
  32.2  
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
Furnished herewith.
         
  99.1     Alliance Boots GmbH audited consolidated financial statements for the years ended March 31, 2012, 2011 and 2010.  Incorporated by reference to Exhibit 99.1 to Walgreen Co.’s Current Report on Form 8-K/A (File No. 1-00604) filed with the SEC on September 10, 2012.
         
  101  
The following financial statements and footnotes from the Walgreen Co. Annual Report on Form 10-K for the year ended August 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Earnings; (ii) Consolidated Statement of Cash Flows; (iii) Consolidated Balance Sheet; (iv) Consolidated Statement of Shareholders' Equity, and (v) the Notes to Consolidated Financial Statements.
Filed herewith.


*
Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  Copies of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.

**
Other instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries may be omitted from Exhibit 4 in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K.  Copies of any such agreements will be furnished supplementally to the SEC upon request.


 

 


WALGREEN CO. AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED AUGUST 31, 2012, 2011 AND 2010

(Dollars in Millions)

   
Balance at Beginning of Period
   
Additions Charged to Costs and Expenses
   
Deductions
   
Balance at End of Period
 
                         
                         
Allowances deducted from receivables for doubtful accounts -
                       
                         
          Year Ended August 31, 2012
  $ 101     $ 107     $ (109 )   $ 99  
                                 
          Year Ended August 31, 2011
  $ 104     $ 88     $ (91 )   $ 101  
                                 
          Year Ended August 31, 2010
  $ 110     $ 111     $ (117 )   $ 104  


 

 

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, 2012 and 2011, and for each of the three years in the period ended August 31, 2012, and the Company’s internal control over financial reporting as of August 31, 2012, and have issued our report thereon dated October 19, 2012; such consolidated financial statements and report are included in your 2012 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.


Chicago, Illinois
October 19, 2012

 

 

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.

WALGREEN CO.
 
October 19, 2012                                                                           By:   /s/  Wade D. Miquelon
Wade D. Miquelon
Executive Vice President and Chief Financial Officer and President, International

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.

   
Name
 
Title
 
Date
             
   
/s/  Gregory D. Wasson
 
President and Chief Executive Officer
 
October 19, 2012
   
Gregory D. Wasson
 
(Principal Executive Officer)
   
             
   
/s/  Wade D. Miquelon
 
Executive Vice President and Chief Financial Officer and President, International
 
October 19, 2012
   
Wade D. Miquelon
 
(Principal Financial Officer)
   
             
   
/s/  Mia M. Scholz
 
Senior Vice President – Corporate Financial Operations, Controller and Chief Accounting Officer
 
October 19, 2012
   
Mia M. Scholz
  (Principal Accounting Officer)    
             
   
/s/  Jan Babiak
 
Director
 
October 19, 2012
   
Jan Babiak
       
             
   
/s/  David J. Brailer
 
Director
 
October 19, 2012
   
David J. Brailer
       
             
   
/s/  Steven A. Davis
 
Director
 
October 19, 2012
   
Steven A. Davis
       
             
   
/s/  William C. Foote
 
Director
 
October 19, 2012
   
William C. Foote
       
             
   
/s/  Mark P. Frissora
 
Director
 
October 19, 2012
   
Mark P. Frissora
       
             
   
/s/  Ginger L. Graham
 
Director
 
October 19, 2012
   
Ginger L. Graham
       
             
   
/s/  Alan G. McNally
 
Director
 
October 19, 2012
   
Alan G. McNally
       
             
   
/s/  Dominic P. Murphy
 
Director
 
October 19, 2012
   
Dominic P. Murphy
       
             
   
/s/  Stefano Pessina
 
Director
 
October 19, 2012
   
Stefano Pessina
       
             
   
/s/  Nancy M. Schlichting
 
Director
 
October 19, 2012
   
Nancy M. Schlichting
       
             
   
/s/  David Y. Schwartz
 
Director
 
October 19, 2012
   
David Y. Schwartz
       
             
   
/s/  Alejandro Silva
 
Director
 
October 19, 2012
   
Alejandro Silva
       
             
   
/s/  James A. Skinner
 
Chairman of the Board
 
October 19, 2012
   
James A. Skinner
       


 

 

INDEX

 
Exhibit No.
                                                                    Description
     
 
10.7
Form of Restricted Stock Unit Award Agreement (effective November 1, 2012).
     
 
12
Computation of Ratio of Earnings to Fixed Charges.
     
 
13
Portions of the Walgreen Co. Annual Report to shareholders for the fiscal year ended August 31, 2012. This report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is being furnished for the information of the Securities and Exchange Commission and is not deemed to be "filed" as a part of the filing of this Form 10-K.
     
 
21
Subsidiaries of the Registrant.
     
 
23
Consent of Independent Registered Public Accounting Firm.
     
 
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
     
 
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
     
 
101
The following financial statements and footnotes from the Walgreen Co. Annual Report on Form 10-K for the year ended August 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Earnings; (ii) Consolidated Statement of Cash Flows; (iii) Consolidated Balance Sheet; (iv) Consolidated Statement of Shareholders' Equity, and (v) the Notes to Consolidated Financial Statements.


 


 


WALGREEN CO.


LONG-TERM PERFORMANCE INCENTIVE PLAN


RESTRICTED SHARE UNIT AWARD AGREEMENT










 




These materials, which may include descriptions of company stock plans, prospectuses and other information and documents, and the information they contain, are provided by Walgreen Co., not by Fidelity, and are not an offer or solicitation by Fidelity for the purchase of any securities or financial instruments.  These materials were prepared by Walgreen Co., which is solely responsible for their contents and for compliance with legal and regulatory requirements.  Fidelity is not connected with any offering or acting as an underwriter in connection with any offering of securities or financial instruments of Walgreen Co.  Fidelity does not review, approve or endorse the contents of these materials and is not responsible for their content.

 

 


WALGREEN CO.
LONG-TERM PERFORMANCE INCENTIVE PLAN
RESTRICTED SHARE UNIT AWARD AGREEMENT


Participant Name:
Participant ID:
Grant Date:  November 1, 2012
Units Granted:
Vesting Date:  [November 1, 2015, provided the Performance Goal described in Section 4 is met]
Acceptance Date:
Electronic Signature:
 
This document (referred to below as the “Agreement” or the “Award Agreement”) spells out the terms and conditions of the Restricted Share Unit Award provided by Walgreen Co., an Illinois corporation (the “Company”), to the individual employee designated above (the “Employee”) pursuant to the Walgreen Co. Long-Term Performance Incentive Plan and related plan documents (the “Plan”) on and as of the Award Date designated above.  Except as otherwise defined herein, capitalized terms used in this Agreement have the respective meanings set forth in the Plan.

The parties hereto agree as follows:

1. Grant of Restricted Share Units.  Pursuant to the approval and direction of the Compensation Committee of the Company’s Board of Directors (the “Committee”) under Sections 3.2, 5 and 6 of the Plan, the Company hereby grants to the Employee, the number of restricted share units specified above (the “Restricted Share Units”), subject to the terms and conditions of the Plan and this Agreement.
 
2. Restrictions.  The Restricted Share Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, whether voluntarily or involuntarily or by operation of law.  The Employee shall have no rights in the shares of Company common stock (the “Common Stock”) underlying the Restricted Share Units until the termination of the applicable Period of Restriction (as defined in Section 4 below) or as otherwise provided in the Plan or this Agreement.  The Employee shall not have any voting rights with respect to the Restricted Share Units.
 
3. Restricted Share Unit Account and Dividend Equivalents.  The Company shall maintain an account (the “Account”) on its books in the name of the Employee.  Such Account shall reflect the number of Restricted Share Units awarded to the Employee as well as any additional Restricted Share Units credited as a result of dividend equivalents, administered as follows:
 
(a) The Account shall be for recordkeeping purposes only, and no assets or other amounts shall be set aside from the Company’s general assets with respect to such Account.
 
(b) As of each record date with respect to which a cash dividend is to paid with respect to shares of Common Stock, the Company shall credit the Employee’s Account with an equivalent amount of Restricted Share Units based upon the value of Common Stock on such date.
 
(c) If dividends are paid in the form of shares of Common Stock rather than cash, then the Employee will be credited with one additional Restricted Share Unit for each share of Common Stock that would have been received as a dividend had the Employee’s outstanding Restricted Share Units been shares of Common Stock.
 
(d) Additional Restricted Share Units credited via dividend equivalents shall vest or be forfeited at the same time as the Restricted Share Units to which they relate.
 
4. Period of Restriction.  The period prior to the date the Restricted Share Units become vested is referred to as the “Period of Restriction.”  Subject to the provisions of the Plan and this Agreement, unless vested or forfeited earlier as described in Section 5, 6, 7 or 8 of this Agreement, as applicable, the Period of Restriction for the Restricted Share Units awarded hereunder shall end, and the Restricted Share Units shall become vested and settled as described in Section 9 below, as of November 1, 2015, provided the performance goal described below in this Section 4 (“Performance Goal”) is satisfied in the fiscal year ending August 31, 2013.  The Performance Goal is attainment of 50% of threshold FIFO Adjusted EBIT established as a goal for the fiscal year ending August 31, 2013, as determined under the Management Incentive Plan and certified by the Committee.  If the Performance Goal is not attained as of the end of the 2013 fiscal year, the Restricted Share Units awarded hereunder shall be thereupon forfeited.
 
5. Vesting upon Termination due to Disability or Death.  If (a) on or prior to August 31, 2013, or (b) after August 31, 2013 but solely if the Performance Goal has been attained, the Employee terminates employment with the Company (or a Subsidiary of the Company if the Employee is then in the employ of such Subsidiary) by reason of Disability (as defined in the Plan) or death during the Period of Restriction, then the Restricted Share Units shall become fully vested as of the date of employment termination without regard to the Period of Restriction.  The term “Subsidiary” is defined in the Plan and means a corporation with respect to which the Company directly or indirectly owns 50% or more of the voting power. Any Restricted Share Units becoming vested by reason of the Employee’s death or Disability shall be settled on the date of the Employee’s separation from service (within the meaning of Internal Revenue Code (“Code”) Section 409A), or as soon as practicable thereafter, but in no event later than 90 days after such date; provided, however, to the extent required under Code Section 409A, if the Employee is a specified employee (within the meaning of Code Section 409A at the time of separation from service), payment shall not be made until the date which is six months after the Employee’s separation from service.
 
6. Vesting upon Termination due to Retirement.  If (a) on or prior to August 31, 2013, or (b) after August 31, 2013 but solely if the Performance Goal has been attained, the Employee terminates employment with the Company (or a Subsidiary of the Company if the Employee is then in the employ of such Subsidiary) by reason of Retirement (as defined in the Plan) during the Period of Restriction, then a pro-rated portion of the Restricted Stock Units subject to the Period of Restriction shall become fully vested as of the date of employment termination, and the Period of Restriction shall end with respect to those units.  Such pro-rated portion shall equal the number of Restricted Stock Units, multiplied by a fraction equal to the number of full months completed between the Award Date and the Employee’s retirement date, divided by thirty six (36).  The remaining Restricted Stock Units shall be forfeited as of the Employee’s termination of employment due to Retirement. Any Restricted Stock Units becoming vested by reason of the Employee’s Retirement shall be settled on the date of the Employee’s separation from service (within the meaning of Internal Revenue Code Section 409A), or as soon as practicable thereafter, but in no event later than 90 days after such date; provided, however, to the extent required under Code Section 409A, if the Employee is a specified employee (within the meaning of Code Section 409A), payment shall not be made until date which is six months after the Employee’s separation from service.
 
7. Forfeiture upon Termination due to Reason other than Retirement, Disability or Death.  If, while the Restricted Share Units are subject to a Period of Restriction, the Employee’s employment with the Company (or a Subsidiary of the Company if the Employee is then in the employ of such Subsidiary) terminates for a reason other than the Employee’s Disability or death, then the Employee shall forfeit any portion of the Restricted Share Units that is subject to a Period of Restriction on the date of such employment termination.
 
8. Vesting upon Change in Control.  In the event of a “Change in Control” of the Company, as defined in Section 11.2 of the Plan, occurring either (a) on or prior to August 31, 2013, or (b) after August 31, 2013, but solely if the Performance Goal has been attained, then, pursuant to Section 11.1 of the Plan the Restricted Share Units shall cease to be subject to the Period of Restriction and shall be settled in accordance with Section 10; provided that, if the Change in Control is not also considered a change in control within the meaning of Internal Revenue Code Section 409A, then the Restricted Share Units shall become vested and the Period of Restriction shall lapse on the date of the Change in Control, but settlement shall not occur until the earlier of the Participant’s separation from service (within the meaning of Code Section 409A), or November 1, 2015.
 
9. Settlement of Vested Restricted Share Units.  Subject to the requirements of Sections 12 and 13 below, as promptly as practicable after the [lapse of the Restriction Period, but in no event later than 90 days after such date, the Company shall transfer to the Employee one share of Common Stock for each Restricted Share Unit becoming vested at such time net of any applicable tax withholding requirements that are necessary to satisfy withholding taxes in accordance with Section 12 below; provided, however, that if settlement is triggered by the employee’s separation from service, then, to the extent required under Code Section 409A, if the Employee is a specified employee (within the meaning of Code Section 409A at the time of separation from service), payment shall not be made until the date which is six months after the Employee’s separation from service.  The Employee shall have no rights as a stockholder with respect to the Restricted Share Units awarded hereunder prior to the date of issuance to the Employee of a certificate or certificates for such shares.  Certificates for the shares of Common Stock shall be issued and delivered to the Employee, the Employee’s legal representative, or a brokerage account for the benefit of the Employee, as the case may be, or such shares may be held in book entry form.
 
10. Settlement Following Change in Control.  Notwithstanding any provision of this Agreement to the contrary, in connection with or after the occurrence of a Change in Control as defined in Section 11.2 of the Plan, the Company may, in its sole discretion, fulfill its obligation with respect to all or any portion of the Restricted Share Units that cease to be subject to a Period of Restriction in accordance with Section 8 above, by:
 
(a) delivery of (i) the number of shares of Common Stock that corresponds with the number of Restricted Share Units that have ceased to be subject to a Period of Restriction or (ii) such other ownership interest as such shares of Common Stock that correspond with the vested Restricted Share Units may be converted into by virtue of the Change in Control transaction in accordance with Section 9 above;
 
(b) payment of cash in an amount equal to the fair market value of the Common Stock that corresponds with the number of vested Restricted Share Units at that time; or
 
(c) delivery of any combination of shares of Common Stock (or other converted ownership interest) and cash having an aggregate fair market value equal to the fair market value of the Common Stock that corresponds with the number of Restricted Share Units that have become vested at that time.
 
11. Adjustment in Capitalization.  In the event of any change in the Common Stock of the Company, the provisions of Section 10.2 of the Plan shall govern such that the number of Restricted Share Units subject to this Agreement shall be equitably adjusted by the Committee.
 
12. Tax Withholding.  Whenever a Period of Restriction applicable to the Employee’s rights to some or all of the Restricted Share Units lapses as provided in Section 4, 5, 6 or 8 of this Agreement, the Company or its agent shall notify the Employee of the related amount of tax that must be withheld under applicable tax laws. Regardless of any action the Company, any Subsidiary of the Company, or the Employee’s employer takes with respect to any or all income tax, social security, payroll tax, payment on account or other tax-related withholding (“Tax”) that the Employee is required to bear pursuant to all applicable laws, the Employee hereby acknowledges and agrees that the ultimate liability for all Tax is and remains the responsibility of the Employee.
 
Prior to receipt of any shares that correspond to Restricted Share Units that vest in accordance with this Agreement, the Employee shall pay or make adequate arrangements satisfactory to the Company and/or any Subsidiary of the Company to satisfy all withholding and payment on account obligations of the Company and/or any Subsidiary of the Company.  In this regard, the Company shall sell or arrange for the sale of Common Stock that the Employee is due to acquire to satisfy the withholding obligation for Tax and/or withhold any Common Stock.  Finally, the Employee agrees to pay the Company or any Subsidiary of the Company any amount of any Tax that the Company or any Subsidiary of the Company may be required to withhold as a result of the Employee’s participation in the Plan that cannot be satisfied by the means previously described.  The Company may refuse to deliver Common Stock if the Employee fails to comply with its obligations in connection with the tax as described in this section.

The Company advises the Employee to consult his or her legal and/or tax advisors with respect to the tax consequences for the Employee under the Plan.

13. Securities Laws.  This award may be accepted only by an individual who is an employee of the Company or a Subsidiary of the Company and who satisfies the eligibility requirements outlined in the Plan and the Committee’s administrative procedures.  If a Registration Statement under the Securities Act of 1933, as amended, is not in effect with respect to the shares of Common Stock to be issued pursuant to this Agreement, the Employee hereby represents that he or she is acquiring the shares of Common Stock for investment and with no present intention of selling or transferring them and that he or she will not sell or otherwise transfer the shares except in compliance with all applicable securities laws and requirements of any stock exchange on which the shares of Common Stock may then be listed.
 
14. No Employment or Compensation Rights.  Participation in the Plan is subject to all of the terms and conditions of the Plan and this Agreement.  This Agreement shall not confer upon the Employee any right to continuation of employment by the Company or its Subsidiaries, nor shall this Agreement interfere in any way with the Company’s or its Subsidiaries’ right to terminate Employee’s employment at any time.  Neither the Plan nor this Agreement forms any part of any contract of employment between the Company or any Subsidiary and the Employee, and neither the Plan nor this Agreement confers on the Employee any legal or equitable rights (other than those related to the Restricted Share Unit award) against the Company or any Subsidiary or directly or indirectly gives rise to any cause of action in law or in equity against the Company or any Subsidiary.
 
15. Plan Terms and Committee Authority.  This Agreement and the rights of the Employee hereunder are subject to all of the terms and conditions of the Plan, as it may be amended from time to time, as well as to such rules and regulations as the Committee may adopt for administration of the Plan.  It is expressly understood that the Committee is authorized to administer, construe and make all determinations necessary or appropriate for the administration of the Plan and this Agreement, all of which shall be binding upon Employee, including the enforcement of any recoupment policy.  Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan.  The Employee hereby acknowledges receipt of a copy of the Plan and this Agreement.
 
16. Non-Competition, Non-Solicitation and Confidentiality.  As a condition to the receipt of this Restricted Share Unit award, the Employee must agree to the terms and conditions set forth in the Non-Competition, Non-Solicitation and Confidentiality Agreement attached hereto as Exhibit A by executing that Agreement.  Failure to execute and return the Non-Competition, Non-Solicitation and Confidentiality Agreement within 120 days of the Award Date shall constitute a decision by the Employee to decline to accept this Restricted Share Unit award.
 
17. Amendment or Modification, Waiver.  Except as set forth in the Plan, no provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Employee and by a duly authorized officer of the Company. No waiver of any condition or provision of this Agreement shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time.
 
18. Governing Law and Jurisdiction.  This Agreement is governed by the substantive and procedural laws of the state of Illinois.  The Employee and the Company shall submit to the exclusive jurisdiction of, and venue in, the courts in Illinois in any dispute relating to this Agreement.
 
****
 
Please read the attached Exhibit A.  Once you have read the agreement, please click the acceptance box to certify and confirm your agreement to be bound by the terms and conditions set forth in Exhibit A, and to acknowledge your receipt of the Plan and this Award Agreement and your acceptance of the Restricted Share Unit award issued hereunder.
 
 
                                                           Very truly yours,
                /s/ Gregory Wasson

 

 

EXHIBIT A

WALGREEN CO. NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY AGREEMENT

This Exhibit forms a part of the Restricted Share Unit Award Agreement covering Restricted Share Units awarded to an employee of Walgreen Co., on behalf of itself, its affiliates, subsidiaries, and successors (collectively referred to as “Employee” and the “Company”).
 
WHEREAS, the Company develops and/or uses valuable business, technical, proprietary, customer and patient information it protects by limiting its disclosure and by keeping it secret or confidential;
 
WHEREAS, Employee acknowledges that during the course of employment, he or she has or will receive, contribute, or develop such confidential information; and
 
WHEREAS, the Company desires to protect from its competitors such confidential information and also desires to protect its legitimate business interests and goodwill in maintaining its employee and customer relationships.
 
NOW THEREFORE, in consideration of the Restricted Share Unit award issued to Employee pursuant the Award Agreement to which this is attached as Exhibit A, Employee agrees to be bound by the terms of this Agreement:
 
1.           Confidentiality.  I understand that during the course of my employment with the Company, I have or will have access to the Company’s Confidential Information, meaning information which is not generally ascertainable by proper means by the public, or which has limited disclosure within the Company, or which is treated or designated as confidential; the disclosure of which could reasonably be harmful to the Company’s legitimate business interests.
 
I understand that “Confidential Information” includes, but is not limited to, the following:

 
(a)
business or marketing plans, trade secrets, selling and pricing procedures and techniques, customer records,
 
(b)
customer lists, requirements, and information,
 
(c)
databases and software developed or used by the Company, financial information and projections, and other information for which the Company has assumed an obligation of confidentiality.

I agree to only use the Company’s Confidential Information as necessary to perform my job during my employment with the Company.  I agree not to disclose any Confidential Information to anyone outside the Company without the Company’s prior written consent, unless as necessary to perform my job during my employment with the Company.  I agree that these obligations apply during my employment with the Company and at all times thereafter.

2.         Non-Competition.  I agree that during my employment with the Company and for one year after the termination of my employment, I will not, directly or indirectly, invest in, own, operate, finance, control, or provide Competing Services to any Competing Business Line, in both cases as defined below.  I understand that the restrictions in this paragraph apply no matter whether my employment is terminated by me or the Company and no matter whether that termination is voluntary or involuntary.  The above restrictions shall not apply to passive investments of less than 5% ownership interest in any entity. I understand that the term “Competing Business Line” used in this Agreement means any business that is in competition with any business engaged in by the Company with respect to which I provide substantial services during the last two years of my employment with the Company.

I understand that I will be deemed to be providing “Competing Services” if the nature of such services are sufficiently similar in position scope and geographic scope to any position held by me during the last two years of my employment with the Company, such that my engaging in such services on behalf of a Competing Business Line may pose competitive harm to the Company.

4.           Non-Solicitation.  I agree that during my employment with the Company and for two years after the termination of my employment, I will not solicit or service any of the Company’s customers or referral sources for a Competing Business Line; solicit or otherwise encourage any Company employees to leave the Company to work for a Competing Business Line; or hire any Company employees on behalf of a Competing Business Line.  I understand that the restrictions in this paragraph apply no matter whether my employment is terminated by me or the Company and no matter whether that termination is voluntary or involuntary.  I understand that the term “customer” used in this Agreement means any patient or other customer or prospective customer of any Company business unit with respect to which I provide substantial services during the last two years of my employment with the Company.
 
5.           Non-Inducement.  I will not directly or indirectly assist or encourage any person or entity in carrying out or conducting any activity that would be prohibited by this Agreement if such activity were carried out or conducted by me.
 
6.           Nondisparagment.  I agree (whether or not then an Employee) not to make negative comments or otherwise disparage the Company, its Affiliates, or any of their officers, directors, employees, shareholders, members, agents or products other than in the good faith performance of my duties to the Company and its Affiliates while I am employed by the Company and its Affiliates and thereafter.  The foregoing shall not be violated by truthful statements in response to legal process, required governmental testimony or filings, or administrative or arbitral proceedings (including, without limitation, depositions in connection with such proceedings).
 
7.           Return of Company Property.  I agree that I will not take any of the Company’s property or information with me when I leave the Company’s employ, no matter what form that property or information is in and no matter how I acquired it.  When my employment with the Company terminates, I will immediately return to the Company any and all Company information, documents, and electronics.
 
8.           Consideration and Acknowledgments.  Employee acknowledges and agrees that the covenants described in this Agreement are essential terms, and the underlying Restricted Share unit award would not be provided by the Company in the absence of these covenants.  Employee further acknowledges that these covenants are supported by adequate consideration as set forth in this Agreement, that full compliance with these covenants will not prevent Employee from earning a livelihood following the termination of his or her employment, and that these covenants do not place undue restraint on Employee and are not in conflict with any public interest.  Employee further acknowledges and agrees that Employee fully understands these covenants, has had full and complete opportunity to discuss and resolve any ambiguities or uncertainties regarding these covenants before signing this Agreement, that these covenants are reasonable and enforceable in every respect, and has voluntarily agreed to comply with these covenants for their stated term.  Employee agrees that in the event he or she is offered employment with a Competing Business at any time in the future, Employee shall immediately notify the Competing Business of the existence of the covenants set forth above.
 
9.           Enforceability; General Provisions.
 
 
(a)
I agree that the restrictions contained in this Agreement are reasonable and necessary to protect the Company’s legitimate business interests and that full compliance with the terms of this Agreement will not prevent me from earning a livelihood following the termination of my employment, and that these covenants do not place undue restraint on me.

 
(b)
Because the Company’scurrent base of operations is in Illinois, I consent to the jurisdiction of the state and federal courts of Illinois with respect to any claim arising out of this Agreement.

 
(c)
Because the Company’scurrent base of operations is in Illinois, I agree that this Agreement shall be governed by the laws of Illinois without regard to its choice of law rules.

 
(d)
In the event of a breach or a threatened breach of this Agreement, I acknowledge that the Company will face irreparable injury which may be difficult to calculate in dollar terms and that the Company shall be entitled, in addition to all remedies otherwise available in law or in equity, to temporary restraining orders and preliminary and final injunctions enjoining such breach or threatened breach in any court of competent jurisdiction without the necessity of posting a surety bond, as well as to obtain an equitable accounting of all profits or benefits arising out of any violation of this Agreement.

 
(e)
I agree that if a court determines that any of the provisions in this Agreement is unenforceable or unreasonable in duration, territory, or scope, then that court shall modify those provisions so they are reasonable and enforceable, and enforce those provisions as modified.

 
(f)
If any phrase or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, that phrase, clause or provision shall be deemed severed from this Agreement, and will not affect the enforceability of any other provisions of this Agreement, which shall otherwise remain in full force and effect.

 
(g)
Notwithstanding the foregoing provisions of this Agreement, the non-competition provisions of Paragraph 2 above shall not restrict Employee from performing legal services as a licensed attorney for a Competing Business to the extent that the attorney licensure requirements in the applicable jurisdiction do not permit Employee to agree to the otherwise applicable restrictions of Paragraph 2.

 
(h)
Waiver of any of the provisions of this Agreement by the Company in any particular instance shall not be deemed to be a waiver of any provision in any other instance and/or of the Company’s other rights at law or under this Agreement.
 
 
(i)
I agree that the Company may assign this Agreement to its successors and that any such successor may stand in the Company’s shoes for purposes of enforcing this Agreement.
 
 
(j)
I agree to reimburse Company for all attorneys’ fees, costs, and expenses that it reasonably incurs in connection with enforcing its rights and remedies under this Agreement, but only to the extent the Company is ultimately the prevailing party in the applicable legal proceedings.

 
(k)
If I violate this Agreement, then the restrictions set out in Paragraphs 2 - 5 shall be extended by the same period of time as the period of time during which the violation(s) occurred.

 
(l)
I fully understand my obligations in this Agreement, have had full and complete opportunity to discuss and resolve any ambiguities or uncertainties regarding these covenants before signing this Agreement, and have voluntarily agreed to comply with these covenants for their stated terms.

10.           Relationship of Parties.  I acknowledge that my relationship with the Company is “terminable at will” by either party and that the Company or I can terminate the relationship with or without cause and without following any specific procedures.  Nothing contained in this Agreement is intended to or shall be relied upon to alter the “terminable at will” relationship between the parties.
 
11.           Modifications and Other Agreements.  I agree that the terms of this Agreement may not be modified except by a written agreement signed by both me and the Company.  This Agreement shall not supersede any other restrictive covenants to which I may be subject under an employment contract, benefit program or otherwise, such that the Company may enforce the terms of any and all restrictive covenants to which I am subject.

12.           Notification.  I agree that in the event I am offered employment at any time in the future with any entity that may be considered a Competing Business Line, I shall immediately notify such Competing business of the existence and terms of this Agreement.  I also understand and agree that the Company may notify anyone later employing me of the existence and provisions of this Agreement.
 
***                    ***                    ***                    ***                    ***

By clicking the acceptance box for this grant agreement, I acknowledge receipt of the Restricted Share Unit Agreement to which this Agreement is attached as Exhibit A, and I agree to the terms and conditions expressed in this Agreement.

Exhibit 12
 
 
 


 
   
Fiscal Year Ended
 
   
8/31/2012
   
8/31/2011
   
8/31/2010
   
8/31/2009
   
8/31/2008
 
Income before income taxes
  $ 3,376     $ 4,294     $ 3,373     $ 3,164     $ 3,429  
Add:
                                       
Minority Interests
                                       
Fixed charges
    1,260       1,212       1,100       996       842  
Amortization of capitalized interest
    6       5       -       -       -  
Less: Capitalized interest
    (9 )     (10 )     (12 )     (16 )     (19 )
Earnings as defined
  $ 4,633     $ 5,501     $ 4,461     $ 4,144     $ 4,252  
                                         
Interest expense, net of capitalized interest
  $ 94     $ 77     $ 90     $ 91     $ 18  
Capitalized interest
    9       10       12       16       19  
Portions of rentals representative of the interest factor
    1,157       1,125       998       889       804  
Fixed charges as defined
  $ 1,260     $ 1,212     $ 1,100     $ 996     $ 841  
                                         
Ratio of earnings to fixed charges
    3.68       4.54       4.06       4.16       5.06  



Five-Year Summary of Selected Consolidated Financial Data
Walgreen Co. and Subsidiaries
(Dollars in Millions, except per share and location amounts)

Fiscal Year
 
2012(1)
   
2011
   
2010(4)
   
2009
   
2008
 
Net sales
  $ 71,633     $ 72,184     $ 67,420     $ 63,335     $ 59,034  
Cost of sales (2)
    51,291       51,692       48,444       45,722       42,391  
Gross Profit
    20,342       20,492       18,976       17,613       16,643  
Selling, general and administrative expenses (1) (2) (6)
    16,878       16,561       15,518       14,366       13,202  
Gain on sale of business (3)
    -       434       -       -       -  
Operating Income
    3,464       4,365       3,458       3,247       3,441  
Interest expense, net (1)
    (88 )     (71 )     (85 )     (83 )     (11 )
Earnings Before Income Tax Provision
    3,376       4,294       3,373       3,164       3,430  
Income tax provision (5)
    1,249       1,580       1,282       1,158       1,273  
Net Earnings
  $ 2,127     $ 2,714     $ 2,091     $ 2,006     $ 2,157  
Per Common Share
                                       
Net earnings
                                       
Basic
  $ 2.43     $ 2.97     $ 2.13     $ 2.03     $ 2.18  
Diluted
    2.42       2.94       2.12       2.02       2.17  
Dividends declared
    .95       .75       .59       .48       .40  
Book value
    19.32       16.69       15.34       14.54       13.01  
Non-Current Liabilities
                                       
Long-term debt
  $ 4,073     $ 2,396     $ 2,389     $ 2,336     $ 1,337  
Deferred income taxes
    545       343       318       265       150  
Other non-current liabilities
    1,886       1,785       1,735       1,396       1,410  
Assets and Equity
                                       
Total Assets
  $ 33,462     $ 27,454     $ 26,275     $ 25,142     $ 22,410  
Shareholders' Equity
    18,236       14,847       14,400       14,376       12,869  
Return on average shareholders' equity
    12.9 %     18.6 %     14.5 %     14.7 %     18.0 %
Locations
                                       
Year-end (7)
    8,385       8,210       8,046       7,496       6,934  

(1)  
On August 2, 2012, the Company completed the acquisition of 45% of the issued and outstanding share capital of Alliance Boots GmbH in exchange for cash and Company shares.  The Company accounts for this investment using the equity method of accounting on a one-month lag basis.  Because the closing of this investment occurred within one month of the Company’s fiscal year-end, the results of operations of Alliance Boots GmbH are not reflected in the Company’s reported net earnings for fiscal 2012.  Transaction costs associated with the investment were $90 million pre-tax, $82 million or $.11 per diluted share, after tax and after including the earnings per share impact of issuing shares to finance the investment.  Costs included $69 million in selling, general and administrative expenses and $21 million of interest expense.
(2)  
Fiscal 2011, 2010 and 2009 included Rewiring for Growth restructuring and restructuring-related charges of $45 million pre-tax, $28 million after tax, $106 million pre-tax, $67 million after tax; and $252 million pre-tax, $160 million after tax, respectively.  Charges included in cost of sales for fiscal 2011, 2010 and 2009 were $3 million, $40 million and $95 million, respectively.  Selling, general and administrative expenses related to the initiative for fiscal 2011, 2010 and 2009 were $42 million, $66 million and $157 million, respectively.  Fiscal 2012, 2011, 2010 and 2009 included expenses related to Customer Centric Retailing store conversions of $15 million, $84 million, $45 million and $5 million, respectively, all of which were included in selling, general and administrative expenses.
(3)
In fiscal 2011, the Company sold its pharmacy benefit management business, Walgreens Health Initiatives, Inc., to Catalyst Health Solutions, Inc. and recorded a pre-tax gain of $434 million, $273 million or $.30 per diluted share, after tax.
(4)
Includes results of Duane Reade operations since the April 9, 2010 acquisition date.
(5)
Fiscal 2010 included a deferred tax charge of $43 million related to the repeal of a tax benefit for the Medicare Part D subsidy for retiree benefits.
(6)
Fiscal 2008 included a positive adjustment of $79 million pre-tax, $50 million after tax, relating to an adjustment of the Company’s vacation liability.
(7)
Locations include drugstores, worksite health and wellness centers, infusion and respiratory services facilities, specialty pharmacies and mail service facilities.  The foregoing does not include locations of unconsolidated partially owned entities, such as Alliance Boots GmbH, of which the Company owns 45% of the outstanding share capital.

 

 

 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Cautionary Note Regarding Forward-Looking Statements” below and in Item 1A (Risk Factors) in our Annual Report on Form 10-K.   References herein to “Walgreens,” the “Company,” “we,” “us” or “our” refer to Walgreen Co. and its subsidiaries included in the consolidated financial statements and does not include unconsolidated partially owned entities, such as Alliance Boots GmbH, of which we own 45% of the outstanding share capital, except as otherwise indicated or the context otherwise requires.

INTRODUCTION

Walgreens is principally a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise.  General merchandise includes, among other things, household items, convenience and fresh foods, personal care, beauty care, photofinishing and candy.  Customers can have prescriptions filled in retail pharmacies as well as through the mail, and customers may also place orders by telephone and online.  At August 31, 2012, we operated 8,385 locations in 50 states, the District of Columbia, Guam and Puerto Rico.  Total locations do not include 360 Take Care Clinics that are operated primarily within other Walgreens locations or locations of unconsolidated partially owned entities such as Alliance Boots GmbH.


   
Number of Locations
 
Location Type
 
2012
   
2011
   
2010
 
Drugstores
    7,930       7,761       7,562  
Worksite Health and Wellness Centers
    366       355       367  
Infusion and Respiratory Services Facilities
    76       83       101  
Specialty Pharmacies
    11       9       14  
Mail Service Facilities
    2       2       2  
Total
    8,385       8,210       8,046  

The drugstore industry is highly competitive.  In addition to other drugstore chains, independent drugstores and mail order prescription providers, we compete with various other retailers including grocery stores, convenience stores, mass merchants, online pharmacies, warehouse clubs and dollar stores.

Our sales, gross profit margin and gross profit dollars are impacted by, among other things, both the percentage of prescriptions that we fill that are generic and the rate at which new generic drugs are introduced to the market.  In general, generic versions of drugs generate lower total sales dollars per prescription, but higher gross profit margins and gross profit dollars, as compared with patent-protected brand name drugs.  The positive impact on gross profit margins and gross profit dollars typically has been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a “generic conversion.”  In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on our sales, gross profit margins and gross profit dollars.  And, because any number of factors outside of our control or ability to foresee can affect timing for a generic conversion, we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods.

The long-term outlook for prescription utilization is strong due in part to the aging population, the increasing utilization of generic drugs, the continued development of innovative drugs that improve quality of life and control health care costs, and the expansion of health care insurance coverage under the Patient Protection and Affordable Care Act signed into law in 2010 (the ACA).  The ACA seeks to reduce federal spending by altering the Medicaid reimbursement formula (AMP) for multi-source drugs, and when implemented, is expected to reduce Medicaid reimbursements.  State Medicaid programs are also expected to continue to seek reductions in reimbursements independent of AMP.  In addition, we continuously face reimbursement pressure from pharmacy benefit management (PBM) companies, health maintenance organizations, managed care organizations and other commercial third party payers, and our agreements with these payers are regularly subject to expiration, termination or renegotiation.

Following our June 21, 2011 announcement that contract renewal negotiations with pharmacy benefit manager Express Scripts, Inc. (Express Scripts) had been unsuccessful, Walgreens exited the Express Scripts pharmacy provider network as of January 1, 2012.  On July 19, 2012, Walgreens and Express Scripts announced their entry into a new multiyear agreement pursuant to which Walgreens began participating in the broadest Express Scripts retail pharmacy provider network available to Express Scripts clients as of September 15, 2012.  From January 1, 2012, until September 14, 2012, however, Express Scripts’ network did not include Walgreens pharmacies.  Express Scripts, in its capacity as a pharmacy benefits manager, processed approximately 88 million prescriptions filled by Walgreens in fiscal 2011, representing approximately $5.3 billion of our fiscal 2011 net sales.  Compared to fiscal 2011, we estimate that the negative impact of not being part of the Express Scripts, Inc. pharmacy provider network, net of associated cost reductions, was $0.21 per diluted share.

We expect the positive impact of our new agreement with Express Scripts will be incremental over time, particularly over the first several quarters after September 15, 2012. While we cannot predict with certainty which Express Scripts clients will choose to include us in their pharmacy networks after September 15, 2012, we expect that our pharmacies will participate in the pharmacy networks of most clients for which Express Scripts serves as pharmacy benefit manager.  However, one substantial client of Express Scripts, the United States Department of Defense TRICARE program, has announced that Walgreens will continue to not be a part of its pharmacy network and will be designated as a non-network pharmacy provider for TRICARE beneficiaries.  Most of the patients we served in calendar 2011 who participated in a plan for which Express Scripts served as pharmacy benefit manager transitioned to another pharmacy after we exited the Express Scripts network on January 1, 2012. We expect to incur marketing and other costs in connection with efforts to regain former patients and attract new patients covered by plans for which we become a network pharmacy provider as a result of our agreement with Express Scripts.

Ultimately, the magnitude and timing of the impact on our financial results of rejoining the Express Scripts retail pharmacy provider network will depend on our ability to regain former patients and attract new patients covered by existing and new Express Scripts clients; however, we cannot predict with certainty what level of business we will achieve as a result of rejoining the Express Scripts retail pharmacy provider network in any particular future time period. We also intend to continue to pursue initiatives seeking to align our costs with anticipated business levels and requirements over time. Rejoining the Express Scripts retail pharmacy provider network is expected to positively affect our net sales, net earnings and cash flows over time relative to the levels we would otherwise achieve if we were not in the Express Scripts network and to mitigate the adverse effects related to our non-participation in the Express Scripts retail pharmacy provider network during the period from January 1, 2012 through September 14, 2012.  See “Cautionary Note Regarding Forward-Looking Statements.”

Total front-end sales have grown due to sales gains in existing stores, acquired stores and new store openings.  Front-end sales have increased in the non-prescription drugs, beer and wine, beauty, convenience and fresh foods and photofinishing categories.

Periodically, we make strategic acquisitions and investments that fit our long-term growth objectives.  Consideration is given to retail, health and well-being enterprises and other potential acquisitions and investments that provide unique opportunities and fit our business objectives.  On August 2, 2012, we completed the initial investment contemplated by the Purchase and Option Agreement dated June 18, 2012, by and among Walgreens, Alliance Boots GmbH and AB Acquisitions Holdings Limited (the “Purchase and Option Agreement”), which resulted in our acquisition of 45% of the issued and outstanding share capital of Alliance Boots GmbH, in exchange for $4.025 billion in cash and 83,392,670 shares of Walgreens common stock (first step transaction).  Alliance Boots is the largest retail pharmacy, health and daily living destination in Europe with over 3,330 retail locations. Its pharmaceutical wholesaling and distribution businesses, together with associates and joint ventures, operate over 370 distribution centers supplying more than 170,000 pharmacies, doctors, health centers and hospitals.  We account for our 45% investment in Alliance Boots using the equity method of accounting on a one-month lag basis.  Because the closing of this investment occurred within one month of the Company’s fiscal year-end, the results of operations of Alliance Boots GmbH are not reflected in the Company’s reported net earnings for the fiscal quarter or year ended August 31, 2012.  Our 45% proportionate interest in the profit of Alliance Boots GmbH for the three-month period ended October 31, 2012, will be reflected in the Company’s reported net earnings for the fiscal quarter ended November 30, 2012.  

The Purchase and Option Agreement also provides, among other things and subject to the satisfaction or waiver of specified conditions, that we will have the right, but not the obligation, to acquire the remaining 55% interest in Alliance Boots GmbH in exchange for £3.133 billion in cash, payable in British pounds sterling, and 144,333,468 shares of Walgreens common stock, subject to certain specified adjustments (second step transaction).  If Walgreens exercises the call option, in certain limited circumstances, Walgreens may be required to make the entire second step transaction payment in cash.  The call option is exercisable by us, in our sole discretion, at any time during the period beginning February 2, 2015 and ending August 2, 2015.  In addition, in certain specified cases, if Walgreens does not exercise the call option, or Walgreens has exercised the call option but the second step transaction does not close, Walgreens may be required to return to the sellers an approximately 3% interest in Alliance Boots GmbH in exchange for a nominal amount.  Walgreens initial investment and the call option excludes the Alliance Boots minority interest in Galenica Ltd. (Galenica).  The Alliance Boots investment in Galenica continues to be legally owned by Alliance Boots for the benefit of Alliance Boots shareholders other than Walgreeens.  Additional information regarding our investment in Alliance Boots GmbH is available in our Current Reports on Form 8-K filed on June 19, 2012 and August 6, 2012 (as amended by the Form 8-K/A filed on September 10, 2012).  The amendment to our August 6, 2012 Form 8-K filed on September 10, 2012, includes as exhibits thereto Alliance Boots audited consolidated financial statements for the years ended March 31, 2012, 2011 and 2010 (prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board) and unaudited pro forma consolidated financial information related to our 45% investment in Alliance Boots GmbH.   

Other strategic acquisitions in fiscal 2012 included certain assets of BioScrip, Inc.’s (BioScrip) community specialty pharmacies, and centralized specialty and mail services pharmacy businesses, which advance community pharmacy and bring additional specialty pharmacy products and services closer to patients. The Company also grew its infusion business in select markets through the acquisition of Crescent Pharmacy Holdings, LLC (Crescent).  On September 17, 2012, the Company completed its acquisition of USA Drug, which includes 144 drugstore locations operating under the USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse names.  Significant acquisitions in prior years include the purchase of drugstore.com, inc. in fiscal 2011, which enhanced our online presence, and the acquisition of Duane Reade Holdings, Inc., and Duane Reade Shareholders, LLC (Duane Reade) in fiscal 2010, which included all of the Duane Reade stores in the New York City metropolitan area.

All Company sales during the last three fiscal years occurred within the United States, Puerto Rico and Guam.  There were no export sales.  Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company’s share of the net income or loss and cash contributions and distributions to or from these entities.  The Company’s investment in Alliance Boots, which closed on August 2, 2012, and the related second step purchase option were recorded as assets with a $7.0 billion aggregate value on the Company’s August 31, 2012 Consolidated Balance Sheet, which represented 30.9% of the Company’s long-lived assets as of that date.  See Note 5 to Consolidated Financial Statements for additional information.

RESTRUCTURING CHARGES

In 2008, we announced a series of strategic initiatives, approved by the Board of Directors, to enhance shareholder value.  One of these initiatives was a program known as “Rewiring for Growth,” which was designed to reduce cost and improve productivity through strategic sourcing of indirect spend, reducing corporate overhead and work throughout our stores, rationalization of inventory categories, and realignment of pharmacy operations.  These initiatives were completed in the fourth quarter of fiscal 2011.

We recorded $42 million of pre-tax charges in selling, general and administrative expenses in fiscal 2011 associated with our Rewiring for Growth program and $66 million in fiscal 2010.  In addition, as a part of our restructuring efforts, we sold an incremental amount of inventory below traditional retail prices.  The dilutive effect of these sales on gross profit for fiscal years 2011 and 2010 were $3 million and $21 million, respectively.

We realized total savings related to Rewiring for Growth of approximately $1.1 billion in fiscal 2011 compared to our base year of fiscal 2008.  Selling, general and administrative expenses realized total savings of $953 million, while cost of sales benefited by approximately $122 million.  The savings were primarily the result of reduced store labor and personnel and expense reductions.

Additionally, as a part of our Customer Centric Retailing (CCR) initiative, we have modified our store format to enhance category layouts and adjacencies, shelf heights and sight lines, and brand and private brand assortments, all of which were designed to positively impact the shopper experience.  This initiative was completed in the first quarter of fiscal 2012.  In total, we converted 5,843 stores and opened 559 new stores with the CCR format.  In the first quarter of fiscal 2012, we incurred $33 million in total program costs, of which $15 million was included in selling, general and administrative expenses and $18 million in capital costs.  In fiscal 2011, we incurred $144 million in total program costs, of which $84 million was included in selling, general and administrative expenses and $60 million in capital costs.  In fiscal 2010, we incurred $71 million in total program costs, of which $45 million was included in selling, general and administrative expenses and $26 million in capital costs.

OPERATING STATISTICS

   
Percentage Increases/ (Decreases)
 
Fiscal Year
 
2012
   
2011
   
2010
 
Net Sales
    (0.8 )     7.1       6.4  
Net Earnings
    (21.6 )     29.8       4.2  
Comparable Drugstore Sales
    (3.6 )     3.3       1.6  
Prescription Sales
    (3.1 )     6.3       6.3  
Comparable Drugstore Prescription Sales
    (6.1 )     3.3       2.3  
Front-End Sales
    3.6       8.5       6.8  
Comparable Drugstore Front-End Sales
    0.6       3.3       0.5  
Gross Profit
    (0.7 )     8.0       7.7  
Selling, General and Administrative Expenses
    1.9       6.7       8.0  

   
Percent to Net Sales
 
Fiscal Year
 
2012
   
2011
   
2010
 
Gross Margin
    28.4       28.4       28.1  
Selling, General and Administrative Expenses
    23.6       23.0       23.0  

   
Other Statistics
 
Fiscal Year
 
2012
   
2011
   
2010
 
Prescription Sales as a % of Net Sales
    63.2       64.7       65.2  
Third Party Sales as a % of Total Prescription Sales
    95.6       95.6       95.3  
Number of Prescriptions (in millions)
    664       718       695  
Comparable Prescription % Increase/(Decrease)
    (8.4 )     1.5       3.3  
30-Day Equivalent Prescriptions (in millions) *
    784       819       778  
Comparable 30-Day Equivalent Prescription % Increase/(Decrease) *
    (5.1 )     3.7       4.5  
Total Number of Locations
    8,385       8,210       8,046  

* Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

RESULTS OF OPERATIONS

Fiscal 2012 net earnings decreased 21.6% to $2.1 billion, or $2.42 per diluted share, versus last year's earnings of $2.7 billion, or $2.94 per diluted share.   The decrease was primarily attributable to lower sales, the sale of our pharmacy benefit management business in fiscal 2011 and higher selling, general and administrative expenses as a percentage of sales.  Included in fiscal 2012 net earnings and net earnings per diluted share, respectively, was $195 million, or $.22 per diluted share, from the year’s LIFO provision and $161 million, or $.18 per diluted share, in acquisition-related amortization.  Fiscal 2012 net earnings and net earnings per diluted share, respectively, also included $82 million, or $.11 per diluted share, of transaction costs and interest, some of which are non-deductible for tax purposes, and share issuance impact (which affected net earnings per diluted share only) related to the Alliance Boots transaction.  Included in fiscal 2011 net earnings and net earnings per diluted share, respectively, were $273 million, or $.30 per diluted share, associated with the gain on the sale of Walgreens Health Initiatives, Inc., $138 million, or $.15 per diluted share, in acquisition-related amortization and $131 million, or $.14 per diluted share, from the year’s LIFO provision.

Net sales decreased by 0.8% to $71.6 billion in fiscal 2012 compared to increases of 7.1% in 2011 and 6.4% in 2010.  The acquisitions of BioScrip assets and drugstore.com increased total sales by 1.0% in fiscal 2012.  Net sales in fiscal 2012 were negatively impacted by our strategic decision to no longer be a part of the Express Scripts pharmacy provider network, partially offset by sales gains in existing stores and added sales from new stores, each of which included an indeterminate amount of market-driven price changes.  Sales in comparable drugstores were down 3.6% in 2012 and up 3.3% and 1.6% in fiscal years 2011 and 2010, respectively.  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.  Remodels associated with our CCR initiative are not considered major and therefore do not affect comparable drugstore results.  Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition.  We operated 8,385 locations (7,930 drugstores) at August 31, 2012, compared to 8,210 locations (7,761 drugstores) at August 31, 2011, and 8,046 locations (7,562 drugstores) at August 31, 2010.

Prescription sales decreased 3.1% in 2012 compared to increases of 6.3% in 2011 and 6.3% in 2010.  Comparable drugstore prescription sales were down 6.1% in 2012 compared to increases of 3.3% in 2011 and 2.3% in 2010.  Prescription sales were negatively impacted by our strategic decision to no longer be part of the Express Scripts pharmacy provider network.  Prescription sales as a percent of total net sales were 63.2% in 2012, 64.7% in 2011 and 65.2% in 2010.  The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 3.5% for 2012, 2.4% for 2011 and 2.2% for 2010, while the effect on total sales was 1.9% for 2012, 1.4% for 2011 and 1.3% for 2010.  Third party sales, where reimbursement is received from managed care organizations, the government, employers or private insurers, were 95.6% of prescription sales in 2012 and 2011 and 95.3% in 2010.  We receive market-driven reimbursements from third party payers, a number of which typically reset in January.  The total number of prescriptions filled (including immunizations) was approximately 664 million in 2012, 718 million in 2011 and 695 million in 2010.  Prescriptions adjusted to 30-day equivalents were 784 million in 2012, 819 million in 2011 and 778 million in 2010.

Front-end sales increased 3.6% in 2012, 8.5% in 2011 and 6.8% in 2010.  The increase over the prior year was due, in part, to new store openings and improved sales related to non-prescription drugs, beer and wine, beauty, convenience and fresh foods and photofinishing products.  Front-end sales were 36.8% of total sales in fiscal 2012, 35.3% of total sales in fiscal 2011 and 34.8% of total sales in fiscal 2010. Comparable drugstore front-end sales increased 0.6% in 2012, 3.3% in 2011 and 0.5% in 2010.  The increase in fiscal 2012 comparable front-end sales was primarily due to the beer and wine, non-prescription drugs, beauty and photofinishing categories, which were partially offset by decreased sales in household products.

Gross margin as a percent of sales was 28.4% in fiscal 2012 and 2011.  Gross margin in fiscal 2012 was positively impacted by higher front-end margins in the household items, convenience and fresh foods and non-prescription drug categories but offset by lower retail pharmacy margins where lower market-driven reimbursements and a higher provision for LIFO more than offset the impact of new generics including the generic Lipitor.  Gross margin as a percent of sales was 28.4% in fiscal 2011 as compared to 28.1% in fiscal 2010.  Overall margins were positively impacted by higher front-end margins in the non-prescription drug, beauty, personal care and convenience and fresh food categories.  Retail pharmacy margins were also higher as the positive effect of generic drug sales more than offset market-driven reimbursements and the write-down of flu shot inventory.  These positive effects were partially offset by a higher provision for LIFO.

Gross profit dollars in fiscal 2012 decreased 0.7% over the prior year.  The decrease is primarily attributed to lower sales volumes and a higher provision for LIFO.  Gross profit dollars in fiscal 2011 increased 8.0% over fiscal 2010.  The increase is attributed to higher sales volumes and increased front-end and retail pharmacy margins.

We use the last-in, first-out (LIFO) method of inventory valuation.  The LIFO provision is dependent upon inventory levels, inflation rates and merchandise mix.  The effective LIFO inflation rates were 3.30% in 2012, 2.39% in 2011, and 1.70% in 2010, which resulted in charges to cost of sales of $309 million in 2012, $208 million in 2011 and $140 million in 2010.  Inflation on prescription inventory was 10.04% in 2012, 4.64% in 2011 and 4.72% in 2010.  As a result of declining inventory levels, the fiscal 2012 LIFO provision was reduced by $268 million of LIFO liquidation.  In fiscal 2010, we experienced deflation in some non-prescription inventories.   The anticipated LIFO inflation rate for fiscal 2013 is 2.50%.

Selling, general and administrative expenses were 23.6% of sales in fiscal 2012 as compared to 23.0% in 2011.  The increase was primarily due to higher occupancy expense, drugstore.com expenses, including costs associated with the acquisition and integration, investments in strategic initiatives and capabilities, expenses associated with our investment in Alliance Boots GmbH and store direct expense, which were partially offset by lower expenses associated with our CCR remodeling program which was completed in the first quarter of fiscal 2012.  Selling, general and administrative expenses as a percentage of sales remained at 23.0% in 2011 as compared to fiscal 2010.  Increased corporate costs and Duane Reade operational expenses were offset by lower Rewiring for Growth costs and incremental savings from our Rewiring for Growth activities, primarily from expense reduction initiatives and reduced store payroll, as a percentage of sales.

Selling, general and administrative expense dollars increased $317 million, or 1.9% over fiscal 2011.  Operating and integration costs related to drugstore.com added 0.6% and costs associated with our investment in Alliance Boots GmbH added 0.4%.  The remaining increase was primarily attributed to new stores.  Selling, general and administrative expense dollars in fiscal 2011 increased 6.7% over fiscal 2010.  The increase was attributed to higher comparable store spending, new stores and the acquisition of Duane Reade.

Interest was a net expense of $88 million in fiscal 2012, $71 million in fiscal 2011 and $85 million in fiscal 2010.  Interest expense for fiscal 2012, 2011 and 2010 is net of $9 million, $10 million and $12 million, respectively, that was capitalized to construction projects.  In fiscal 2012, we incurred $21 million in interest expense on the bridge term loan facility in conjunction with our investment in Alliance Boots GmbH.  This was partially offset by lower interest expense as a result of the additional $500 million in fixed to variable interest rate swaps, $250 million of which was entered into in May 2012 and $250 million of which was entered into in March 2011.  The reduction in net interest expense from fiscal 2010 to fiscal 2011 was attributed to reduced interest rates associated with our $1.3 billion of fixed to variable interest rate swaps entered into in January 2010.

The effective income tax rate was 37.0% for fiscal 2012, 36.8% for 2011, and 38.0% for 2010.  The increase in the effective tax rate from fiscal 2011 was attributed to certain non-deductible transaction costs associated with the investment in Alliance Boots GmbH.  Fiscal 2010 included a $43 million charge to deferred taxes for the repeal of the tax benefit for the Medicare Part D subsidy for retiree benefits.  We anticipate an effective tax rate of approximately 37.0% in fiscal 2013 before incorporating the investment in Alliance Boots GmbH.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1.3 billion at August 31, 2012, compared to $1.6 billion at August 31, 2011.  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.

On October 14, 2009, our Board of Directors approved a long-term capital policy: to maintain a strong balance sheet and financial flexibility; reinvest in our core strategies; invest in strategic opportunities that reinforce our 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.  

Net cash provided by operating activities was $4.4 billion at August 31, 2012, compared to $3.6 billion a year ago.  The increase was primarily as a result of changes in working capital balances including reduced inventory levels.  Cash provided by operations is the principal source of funds for expansion, investments, acquisitions, remodeling programs, dividends to shareholders and stock repurchases.

Net cash used for investing activities was $5.9 billion versus $1.5 billion last year.  Additions to property and equipment were $1.6 billion compared to $1.2 billion last year.  In fiscal 2012, we added a total of 266 locations (175 net) compared to last year’s 297 locations (164 net).  There were 34 owned locations added during the year and 41 under construction at August 31, 2012, versus 62 owned locations added and 44 under construction as of August 31, 2011.

               
Infusion and
   
Specialty
   
Mail
       
   
Drugstores
   
Worksites
   
Respiratory Services
   
Pharmacy
   
Service
   
Total
 
August 31, 2010
    7,562       367       101       14       2       8,046  
   New/Relocated
    237       21       1       2       -       261  
   Acquired
    32       -       4       -       -       36  
   Closed/Replaced
    (70 )     (33 )     (23 )     (7 )     -       (133 )
August 31, 2011
    7,761       355       83       9       2       8,210  
   New/Relocated
    169       36       5       2       -