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1999 Annual Report | CVS Corporation
Total healthcare solutions for the way we live.

Table of contents

  • Page 1
    1999 Annual Report | CVS Corporation Total healthcare solutions for the way we live.

  • Page 2
    ... dispensing a record 281 million prescriptions. • We opened a record 433 new and relocated CVS/pharmacy stores, and 12 CVS ProCare stores. • We aggressively launched our specialty pharmacy business, CVS ProCare, in this $14 billion fast-growing segment of the pharmacy market. • The first major...

  • Page 3
    ... 96 95 $0.53 $0.78 $1.05 $1.26 $1.55 Five-year compounded annual growth rate 27.9% Five-year compounded annual growth rate 27.0% * Excludes the effect of the merger, restructuring and other nonrecurring charges that were recorded in 1998, 1997, 1996 and 1995. See page 41 for further information.

  • Page 4
    ... mail delivery or in-store pharmacy pickup. At the heart of our long-term growth strategy is cutting-edge technology, which we use aggressively to achieve breakthroughs in service. We are exploring new and innovative ways to provide more personalized service and product offerings that build customer...

  • Page 5
    ... clients in effectively servicing this customer segment. We have truly created a new business model in specialty pharmacy with CVS ProCare. Services are provided through a dedicated specialty pharmacy mail order facility located in Ohio and through retail apothecary stores to be located across the...

  • Page 6
    ..., our photo business experienced rapid growth as we more than doubled the number of one-hour labs in our stores and dramatically increased market share. We expect that growth to continue with the strategic alliance we formed with Kodak to provide innovative new services and position CVS as one of...

  • Page 7
    ...On the Phone and On the Web-to see for yourself how we continually enhance the delivery of total healthcare solutions for the way we live. Sincerely, CVS has created a new business model in the fast-growing specialty pharmacy field. CVS ProCare provides specialty pharmacy mail services and plans to...

  • Page 8
    CVS/pharmacy Total healthcare solutions for the way we live. CVS Corporation Pharmacy Solutions CVS is leading the way in providing new pharmacy solutions for its customers. As a result, we have seen significant growth in the pharmacy business; a 24.4 percent increase in 1999 retail pharmacy sales...

  • Page 9
    ...,000 physicians. Since its start in 1995, PharmaCare has demonstrated rapid sales and earnings growth, making it one of the top 10 PBMs in the nation. Drive-thru pharmacy windows at more than 1,000 CVS stores combine convenience and service for our customers. and cutting-edge technology to provide...

  • Page 10
    ...for front store growth is multifaceted, designed to win new customers and build customer loyalty. CVS is one of the top beauty retailers in the nation. We were the first to offer these new cosmetic lines from Oil of Olay and Neutrogena chainwide, enabling us to capture significant market share. We...

  • Page 11
    ... open and another eight under construction. We expect to open 400 to 450 new CVS opened 433 new stores in 1999 and opened or began construction of 20 ProCare apothecaries. Plans call for the opening of 400-450 stores annually in existing and new markets. number of one-hour photo labs to 2,000 labs...

  • Page 12
    ...leading healthcare player on the Internet, with plans to build the business that are both aggressive and prudent. At CVS.com, customers can order prescriptions for pickup or mail delivery, order refills using the Express Refills feature, and buy general merchandise using a personalized shopping list...

  • Page 13
    ... care partners afford us an excellent position and potential in the specialty pharmacy business. We wanted to better address the special needs of certain customers who require unique products and services. Announced in June 1999, CVS ProCare is committed to the complex and expensive drug therapies...

  • Page 14
    ... Innovation Grants Program works with elementary and secondary public schools to re-examine teaching approaches and explore innovative ways to help children learn. The program provides multiyear financial grants, onsite technical assistance, conferences and other opportunities for educators to share...

  • Page 15
    ... Auditors' Report Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Five-Year Financial Summary Officers and Directors Shareholder Information Store Count...

  • Page 16
    ...1999, 84% in 1998 and 81% in 1997. As you review our sales performance, we believe you should consider the following important information: • Our pharmacy sales growth continued to benefit from our ability to attract and retain managed care customers, our ongoing program of purchasing prescription...

  • Page 17
    ... of our total pharmacy business. Our gross margin on third party sales has continued to decline largely due to the efforts of managed care organizations and other pharmacy benefit managers to reduce prescription drug costs. To address this trend, we have dropped and/or renegotiated a number of third...

  • Page 18
    ... requirements with internally generated funds and commercial paper. We currently expect to continue to utilize our commercial paper program to support our working capital needs. In addition, we may elect to use long-term borrowings in the future to support our continued growth. Our commercial paper...

  • Page 19
    ... and financial reporting requirements for derivative instruments, requires companies to recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. In May 1999, the Financial Accounting Standards Board delayed the implementation date for...

  • Page 20
    ... to the Company's financial reporting, the adequacy of internal accounting controls, and the scope and results of audit work. The internal auditors and independent auditors have free access to the Audit Committee. CVS Corporation Thomas M. Ryan Chairman of the Board and Chief Executive Officer 18...

  • Page 21
    Independent Auditors' Report Board of Directors and Shareholders CVS Corporation: We have audited the accompanying consolidated balance sheets of CVS Corporation and subsidiaries as of January 1, 2000 and December 26, 1998, and the related consolidated statements of operations, shareholders' equity...

  • Page 22
    ...88.8 (13.7) $ 75.1 CVS Corporation Earnings from discontinued operations Earnings before extraordinary item Extraordinary item, loss related to early retirement of debt, net of income tax benefit of $11.4 Net earnings Preference dividends, net of income tax benefit Net earnings available to common...

  • Page 23
    ... of long-term debt Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Commitments and contingencies (Note 12) Shareholders' equity: Preferred stock, $0.01 par value: authorized 120,619 shares; no shares issued or outstanding Preference stock, series one ESOP...

  • Page 24
    ...stock Stock options exercised and awards under stock plans Other End of year Retained earnings: Beginning of year Net earnings Dividends: Preference stock, net of income tax benefit Common stock Immaterial pooling of interests End of year Other: Beginning...737.9 88.8 22 CVS Corporation (14.7) (90...

  • Page 25
    ... tax benefit Change in assets and liabilities, excluding acquisitions: Increase in accounts receivable, net Increase in inventories Increase in other current assets Increase in accounts payable Decrease in accrued expenses Decrease in other assets and other long-term liabilities Net cash provided...

  • Page 26
    ...4,098 retail drugstores and three mail order facilities located in 26 states and the District of Columbia. See Note 13 for further information about the Company's business segments. Basis of presentation ~ The consolidated financial statements include the accounts of the Company and its wholly-owned...

  • Page 27
    ...of goods sold on a straight-line basis over the life of the related contract. Funds that are directly linked to advertising commitments are recognized as a reduction of advertising expense when the related advertising commitment is satisfied. Store opening and closing costs ~ New store opening costs...

  • Page 28
    ... shares of CVS common stock. In addition, outstanding Revco stock options were converted at the same exchange ratio into options to purchase 6.6 million shares of CVS common stock. The CVS/Arbor Merger and CVS/Revco Merger constituted tax-free reorganizations and have been accounted for as pooling...

  • Page 29
    ...the employees had been terminated. 3. The 55 Arbor store locations discussed above would be closed as soon as practical after the merger. At the time the exit plan was executed, management anticipated that these locations would be closed by no later than December 31, 1999. Since these locations were...

  • Page 30
    ... in connection with closing Arbor's corporate headquarters and store facilities. The above costs did not provide future benefit to the retained stores or corporate facilities. In millions Other Total CVS Corporation CVS/Arbor Charge Utilization -- Cash Utilization -- Noncash Transfer(3) Balance...

  • Page 31
    ... benefits) also resulted from the change in control. Exit Costs ~ In conjunction with the merger transaction, management made the decision to close Revco's Twinsburg, Ohio corporate headquarters and 223 Revco store locations. As a result, the following exit plan was executed: 1. Revco's Twinsburg...

  • Page 32
    ... with closing Revco's corporate headquarters. The above costs did not provide future benefit to the retained stores or corporate facilities. Following is a reconciliation of the beginning and ending liability balances as of the respective balance sheet dates: Merger Transaction Costs Employee...

  • Page 33
    ... (iii) the initial and secondary public offerings of Linens 'n Things and (iv) the closing of the Company's administrative office facility located in Rye, New York. The strategic restructuring program was completed without significant changes to the Board approved plan. During the second quarter of...

  • Page 34
    ... respective fiscal years: In millions 1999 Fiscal Year 1998 1997 CVS Corporation (1) See Note 9 for further information about the Company's ESOP Plan. 32 The Company's commercial paper program is supported by a $670 million, five-year unsecured revolving credit facility, which expires on May 30...

  • Page 35
    ... compensation. Eligible Directors may also elect to defer compensation payable in common stock until their service as a director concludes. The 1996 DSP replaced the Company's 1989 Directors Stock Option Plan. As of January 1, 2000, there were 247,071 shares available for future grant under the 1996...

  • Page 36
    ... an Employee Stock Ownership Plan. See Note 9 for further information about this plan. Other Postretirement Benefits The Company provides postretirement healthcare and life insurance benefits to retirees who meet eligibility requirements. The Company's funding policy is generally to pay covered...

  • Page 37
    ... funded status of the Company's defined benefit and other postretirement benefit plans as of the respective balance sheet dates: Defined Benefit Plans Fiscal Year 1999 1998 Other Postretirement Benefits Fiscal Year 1999 1998 In millions Change in benefit obligation: Benefit obligation at beginning...

  • Page 38
    ... (the "ESOP Note"). The proceeds from the ESOP Note were used to purchase 6.7 million shares of Series One ESOP Convertible Preference Stock (the "ESOP Preference Stock") from the Company. Since the ESOP Note is guaranteed by the Company, the outstanding balance is reflected as long-term debt and...

  • Page 39
    ...material adverse effect on the Company's consolidated financial condition, results of operations or future cash flows. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Supplemental Information Following are the components of property and equipment included in the consolidated balance sheets as of...

  • Page 40
    ... CVS/pharmacy name. The Retail Pharmacy segment is the Company's only reportable segment. The PBM segment provides a full range of prescription benefit management services to managed care and other organizations. These services include plan design and administration, formulary management, mail order...

  • Page 41
    ... Preference stock Stock options Weighted average common shares, diluted Basic earnings per common share: Earnings from continuing operations before extraordinary item Earnings from discontinued operations Extraordinary item, net of tax benefit Net earnings Diluted earnings per common share: Earnings...

  • Page 42
    ...,200 CVS Corporation Registered shareholders at year-end Fiscal 1998: Net sales Gross margin Operating profit Net earnings Net earnings per common share, basic Net earnings per common share, diluted Dividends per common share Stock price: (New York Stock Exchange) High Low Registered shareholders...

  • Page 43
    ... after-tax) related to the Company changing its policy from capitalizing internally developed software costs to expensing the costs as incurred, outsourcing information technology functions and retaining former employees until their respective job functions were transitioned. (3) Earnings from...

  • Page 44
    ... the University of Pennsylvania Ivan G. Seidenberg Terry R. Lautenbach(2) Retired; formerly Senior Vice President International Business Machines Corporation Chairman of the Board and Chief Executive Officer Bell Atlantic Corporation (1) Member of the Audit Committee. (2) Member of the Compensation...

  • Page 45
    ... Information Corporate Headquarters CVS Corporation One CVS Drive, Woonsocket, RI 02895 (401) 765-1500 Annual Shareholders' Meeting 10:00 a.m. April 19, 2000 CVS Corporate Headquarters Stock Market Listing New York Stock Exchange Symbol: CVS Transfer Agent and Registrar Questions regarding stock...

  • Page 46
    ... 196 New Jersey 387 New York 279 North Carolina 396 Ohio 327 Pennsylvania 53 Rhode Island 183 South Carolina 142 Tennessee 1 Texas 2 Vermont 247 Virginia 48 Washington, D.C. 58 West Virginia * Includes 12 CVS ProCare stores located in California, Florida, Georgia, Maryland, Massachusetts, New York...