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2000 Annual Report
CVS Corporation
retailer in America.
healthcare service
and convenient
innovative,
customer-focused,
To be the most
Achieving Our Goal:

Table of contents

  • Page 1
    Achieving Our Goal: To be the most customer-focused, innovative, and convenient healthcare service retailer in America. 2000 Annual Report CVS Corporation

  • Page 2
    ..., 1, om ers. lif e easier fo r ou r cu st ph ot o labs- m ak in g y, of St ad tland er Ph arm ac n tio isi qu ac e th ed et • We co m pl g sp ecialty #1 in th e fast -g ro w in m ak in g CVS ProCare ph ar m acy m ar ket. fican tly ill io n in free cash , sig ni m 84 $3 d te ra ne ge...

  • Page 3
    Financial Highlights In millions, except per share 2000 (52 weeks) 1999 (53 weeks) % Change Sales Operating profit* Net earnings* Diluted earnings per common share* Closing stock price per common share $ 20,087.5 1,303.5 734.5 1.80 59.94 $ 18,098.3 1,135.5 635.1 1.55 39.88 11.0 14.8 15.7 16.1 50...

  • Page 4
    ... of retail-and CVS is America's #1 Pharmacy. With 4,133 locations, we operate more drugstores than any other company in the U.S. Our pharmacy business continues to register phenomenal same store sales growth, up nearly 18% in 2000. In fact, more prescriptions are filled at CVS/pharmacy than at any...

  • Page 5
    ... in the U.S., and we launched an aggressive expansion into several Florida markets, beginning with Tampa, the 16th largest drugstore market, and Orlando, the 27th largest. In February 2001 we announced plans to build CVS/pharmacy stores in two of the fastest-growing drugstore 3 2000 Annual Report

  • Page 6
    ... 9 million lives. Through its proprietary systems and services, PharmaCare has enabled the managed care community to provide its members with the best healthcare in the most cost-effective manner, while assuring We now operate 46 CVS ProCare specialty pharmacies across the U.S., serving customers...

  • Page 7
    ...Board of Directors and the loyal support of our business partners and customers. We thank you, our shareholders, for your continued confidence in CVS, and we look forward to reporting on our future successes. Thomas M. Ryan Chairman of the Board, President and Chief Executive Officer 5 2000 Annual...

  • Page 8
    ... coverage to share of this growing market. a managed care plan requiring only a customer co-pay, prescription use nearly doubles. These trends, coupled with the possibility of a CVS led the industry with an 18% increase prescription drug benefit for Medicare enrollees, proin pharmacy same store...

  • Page 9
    ... EPIC program throughout our stores, we expect to see improved quality assurance and customer service, while reducing labor costs throughout the Company. We were the first in the industry to introduce Drug Utilization Review (DUR) technology that checks for harmful interactions between prescription...

  • Page 10
    ... in the Front Store Today's busy customers appreciate convenience. Therefore, our strategy at CVS has been to find the most convenient locations and to develop in the front of our stores the best selection of merchandise to meet our customers' everyday needs. Unique Products Exclusive to CVS One of...

  • Page 11
    .... For example, benefits may include opportunities to earn rewards and free merchandise in select categories through support from our vendor partners, exclusive savings on purchases, access to special mailings with highly customized coupons and health information, automatic sweepstakes entries, and...

  • Page 12
    ...of our business, we are investing in technology to improve efficiency and maximize performance in our front-store operations. Computer-assisted ordering is lowering inventory levels in selected categories, and we are testing vendor-managed inventory programs with key over-thecounter and prescription...

  • Page 13
    ... all new CVS stores will be in new markets. Our growth plan is structured to allow us to achieve this goal while sustaining strong earnings growth. New High-Growth Markets In 2000, we entered four new markets: Chicago, Illinois; Grand Rapids, Michigan; and Tampa and Orlando, Florida. Chicago is the...

  • Page 14
    ...of Michigan-based Arbor Drugs, Inc. in 1998, we have reinforced and built upon our presence in this highly attractive market. C V S Pro c a re America's #1 Specialty Pharmacy: CVS ProCare During 2000, we solidified CVS' position as the leading provider of specialty pharmacy services through our CVS...

  • Page 15
    ...a toll-free telephone number. Visitors to CVS.com can research health-related information or shop for thousands of over-theThe CVS.com Pharmacy Counter offers counter items at highly prescription refills and advice competitive prices. for Internet customers. ...healthcare service retailer..."CVS is...

  • Page 16
    ... our exclusive provider of health content, providing our customers with Internet access to reliable health-related information from expert sources. We made the decision in 2000 to relocate CVS.com's operations to our headquarters in Rhode Island to better leverage our Our private label vitamins...

  • Page 17
    ... recipients to work, training them as pharmacy technicians, photo technicians and supervisors. Identified by President Clinton as a leader in this area, CVS is one of a number of prominent national companies that have embraced the Welfareto-Work concept, providing jobs that benefit our communities...

  • Page 18
    ... 31 Florida 280 Georgia 1 Hawaii 73 Illinois 274 Indiana 67 Kentucky * Nevada 29 New Hampshire 209 New Jersey 404 New York 275 North Carolina * New Markets Announced in February 2001 include Phoenix, Arizona and Las Vegas, Nevada. 4,133 Stores ProCare Retail Sites (46) CVS Markets 16 CVS...

  • Page 19
    ...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, Directors and Shareholder Information 18 21 21 22 23 24 25 26 39 40 17 2000 Annual Report

  • Page 20
    ... defense for healthcare and the introduction of a number of successful new prescription drugs also contributed to the growing demand for pharmacy services. • Our front store sales growth was driven by strong performance in the general merchandise, health and beauty, convenience foods and film and...

  • Page 21
    ... 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 party programs that fell below our minimum profitability standards. These continuing efforts have resulted...

  • Page 22
    ...we repurchased 4.7 million shares of common stock at an aggregate cost of $163.2 million. On September 18, 2000, the Company completed the acquisition of certain assets of Stadtlander Pharmacy of Pittsburgh, Pennsylvania, a subsidiary of Bergen Brunswig Corporation, for $124 million in cash plus the...

  • Page 23
    ... their opinion. The Audit Committee of the Board of Directors, consisting solely of outside directors, meets periodically with management, internal auditors and the independent auditors to review matters relating to the Company's financial reporting, the adequacy of internal accounting controls...

  • Page 24
    Consolidated Statements of Operations December 30, 2000 (52 weeks) Fiscal Year Ended January 1, 2000 (53 weeks) December 26, 1998 (52 weeks) In millions, except per share amounts Net sales Cost of goods sold, buying and warehousing costs Gross margin Selling, general and administrative expenses ...

  • Page 25
    ... shares and per share amounts December 30, 2000 January 1, 2000 Assets: Cash and cash equivalents Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Goodwill, net Other assets Total assets Liabilities: Accounts payable...

  • Page 26
    ... In millions December 30, 2000 Shares January 1, 2000 December 26, 1998 December 30, 2000 Dollars January 1, 2000 December 26, 1998 Preference stock: Beginning of year Conversion to common stock End of year Common stock: Beginning of year Stock options exercised and awards under stock plans Other...

  • Page 27
    ... Merger, restructuring and other nonrecurring charges Deferred income taxes and other noncash items Change in operating assets and liabilities, providing/(requiring) cash, net of effects from acquisitions: Accounts receivable, net Inventories Other current assets Other assets Accounts payable...

  • Page 28
    ...In millions December 30, 2000 January 1, 2000 Description of business ~ CVS Corporation ("CVS" or the "Company") is principally in the retail drugstore business. As of December 30, 2000, the Company operated 4,133 retail and specialty pharmacy drugstores and various mail order facilities located in...

  • Page 29
    ...Issued to Employees." The Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25. See Note 5 for further information about the Company's stock incentive plans. Insurance ~ The Company is self-insured for general liability, workers' compensation and...

  • Page 30
    ... is computed by dividing: (i) net earnings, after accounting for the difference between the dividends on the ESOP preference stock and common stock and after making adjustments for the incentive compensation plans by (ii) Basic Shares plus the additional shares that would be issued assuming that all...

  • Page 31
    ...) the dividends paid. Similarly, the guaranteed ESOP obligation is reduced by the higher of (i) the principal payments or (ii) the cost of shares allocated. Following is a summary of the ESOP activity for the respective years: In millions 2000 Fiscal Year 1999 1998 4 Employee Stock Ownership Plan...

  • Page 32
    ... Compensation Plan (the "1997 ICP") provides for the granting of up to 23,382,245 shares of common stock in the form of stock options, stock appreciation rights, restricted shares, deferred shares and performance-based awards to selected officers, employees and directors of the Company. All grants...

  • Page 33
    ...26.4 million in 2000, 1999 and 1998, respectively. The Company also sponsors an Employee Stock Ownership Plan. See Note 4 for further information about this plan. Other Postretirement Benefits The Company provides postretirement healthcare and life insurance benefits to retirees who meet eligibility...

  • Page 34
    ...balance sheet dates: In millions Defined Benefit Plans 2000 1999 Other Postretirement Benefits 2000 1999 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Actuarial loss (gain) Benefits paid Benefit obligation at end of year Change in plan assets: Fair...

  • Page 35
    ... that it could settle these obligations for approximately $876 million as of December 30, 2000. In the opinion of management, the ultimate disposition of these guarantees will not have a material adverse effect on the Company's consolidated financial condition, results of operations or future cash...

  • Page 36
    ...4,087 retail drugstores located in 24 states and the District of Columbia, operates under the 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 providers and other...

  • Page 37
    ... with Arbor Drugs, Inc. ("Arbor"), pursuant to which 37.8 million shares of CVS common stock were exchanged for all the outstanding common stock of Arbor. The merger was a tax-free reorganization that was accounted for as a pooling of interests under APB Opinion No. 16,"Business Combinations." In...

  • Page 38
    ...closing Arbor's corporate headquarters and store facilities. 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...

  • Page 39
    ... of basic and diluted earnings per common share for the respective years: 2000 Fiscal Year 1999 1998 In millions, except per share amounts Numerator for earnings per common share calculation: Net earnings Preference dividends, net of income tax benefit Net earnings available to common shareholders...

  • Page 40
    ...millions, except per share amounts 2000: 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... 186.3 0.47 0.46 0.0575 45.75 30.31 38 CVS Corporation

  • Page 41
    ... prescription drugs, (ii) in 1998, $147.3 million ($101.3 million after-tax) charge related to the merger of CVS and Arbor and $31.3 million ($18.4 million after-tax) of nonrecurring costs incurred in connection with eliminating Arbor's information technology systems and Revco's noncompatible store...

  • Page 42
    ... Corporate Headquarters Stock Market Listing New York Stock Exchange Symbol: CVS Larry J. Merlo Executive Vice President - Stores CVS Corporation Thomas P. Gerrity(1) Professor of Management and Director of The E-Commerce Forum The Wharton School of the University of Pennsylvania Transfer Agent...

  • Page 43
    Design: Clarke & Associates LLC Printing: Avanti/Case-Hoyt

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    Helping you make a difference. CVS Corporation One CVS Drive | Woonsocket, RI 02895