Caremark 1998 Annual Report Download - page 16

CVS Corporation
14
We strongly recommend that you read our audited
consolidated financial statements and footnotes found on
pages 22 through 38 of this Annual Report along with this
important discussion and analysis.
Introduction
1998 was an excellent year for CVS. We are pleased to report
that despite the significant challenges our company faced in
integrating the operations of Arbor Drugs, Inc. and Revco
D.S., Inc., we achieved another record year in terms of net
sales, operating profit and diluted earnings per share,
excluding the effect of the nonrecurring charges and gain.
Our strong performance in 1998 translated into a 72.7%
return to our shareholders. This compares to a total return
of 18.1% for the Dow Jones Industrial Average and 28.6% for
the S&P 500. While we are extremely proud of this
accomplishment, we cannot guarantee that our future
performance will result in similar returns to shareholders.
Our total market capitalization grew to more than $21 billion
at December 31, 1998.
As a result of the significant increase in our stock price, on
May 13, 1998, the Board of Directors approved a two-for-one
common stock split, effective June 15, 1998. At that time, the
Board also approved an increase in our annual post-split cash
dividend to $0.23 per share, underscoring their continued
optimism in our prospects for future growth.
Mergers
As you review our consolidated financial statements and
footnotes, you should carefully consider the impact of the
following merger transactions and the nonrecurring charges
that we recorded:
CVS/Arbor Merger
On March 31, 1998, we completed a merger with Arbor
pursuant to which 37.8 million shares of CVS common stock
were exchanged for all the outstanding common stock of
Arbor. We also converted Arbor’s stock options into options
to purchase 5.3 million shares of our common stock. The
merger of CVS and Arbor was a tax-free reorganization,
which we treated as a pooling of interests under Accounting
Principles Board Opinion No. 16, “Business Combinations.”
Accordingly, we have restated our historical consolidated
financial statements and footnotes to include Arbor as if it
had always been owned by CVS.
The merger with Arbor made us the market share leader in
metropolitan Detroit, the nation’s fourth largest retail drug-
store market, and strengthened our position as the nation’s
top drugstore retailer in terms of store count and retail
prescriptions dispensed. We believe that we can achieve cost
savings from the combined operations of approximately $30
million annually. This will come primarily from closing
Arbor’s corporate headquarters, achieving economies of scale
in advertising, distribution and other operational areas, and
spreading our investment in information technology over a
larger store base. Please read the “Cautionary Statement
Concerning Forward-Looking Statements” section below.
CVS/Revco Merger
On May 29, 1997, we completed a merger with Revco
pursuant to which 120.6 million shares of CVS common
stock were exchanged for all the outstanding common stock
of Revco. We also converted Revco’s stock options into
options to purchase 6.6 million shares of our common stock.
The merger of CVS and Revco was also a tax-free
reorganization that we treated as a pooling of interests.
Accordingly, we have restated our historical consolidated
financial statements and footnotes to include Revco as if it
had always been owned by CVS.
The merger with Revco was a milestone event for our
company in that it more than doubled our revenues and
made us the nation’s number one drugstore retailer in terms
of store count. The merger brought us into high-growth,
contiguous markets in the Mid-Atlantic, Southeast and
Midwest regions of the United States.
$11.8
96 97 98
$13.7
$15.3
5.1%
96 97 98
5.7%
6.2%
$0.78
96 97 98
$1.05
$1.26
Net Sales
(In Billions)
Operating Profit
Percentage*
Diluted Earnings
Per Share**
* Percent of net sales before nonrecurring charges and gain.
** Earnings from continuing operations before nonrecurring charges and gains.
1998 Financial Highlights
Management’s Discussion and Analysis of Financial