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CVS Corporation 2004 Annual Report
At CVS, it’s all in a day’s work...

Table of contents

  • Page 1
    At CVS, it's all in a day's work...CVS Corporation 2004 Annual Report

  • Page 2
    ... we operate. Thanks to the Pharmacy Service Initiative (PSI) we launched in 2003, CVS is also making sure that prescriptions are "ready when promised"â„¢ at any hour. Our pharmacy initiatives have freed up our pharmacists to spend more time counseling customers as well. As a result, customer service...

  • Page 3
    Supported by the latest in technology, there's always a trusted CVS pharmacist ready to meet your prescription needs...even in the middle of the night. 1

  • Page 4
    ... new or relocated CVS stores opened for business. From Southern California and Las Vegas to Minneapolis/St. Paul and Chicago, we focused our expansion efforts on some of the fastestgrowing markets in the country. Meanwhile, we replaced Eckerd signs with CVS/pharmacy signs throughout Florida, Texas...

  • Page 5
    CVS signs are going up across Florida, Texas, and points in between as we rapidly convert acquired Eckerd stores to the CVS/pharmacy brand. 3

  • Page 6
    ... brands as well. Lumene is our largest exclusive beauty brand. Its high quality and affordability appeal to women who might otherwise do their shopping at the department store. In fact, 40 percent of our Lumene customers are new to the skin care category at CVS. Total sales of exclusive and private...

  • Page 7
    Beauty advisors are just one of the ways we help make shopping "CVS easy." Among our beauty solutions, we offer Finland's exclusive Lumene product line. 5

  • Page 8
    ... taken PharmaCare-and our entire business-to the next level. We're the nation's fourth-largest full-service PBM, and we have doubled our number of covered lives to 30 million since last year. We've also combined our strength in specialty pharmacy with the EHS mail order pharmacy business whose sales...

  • Page 9
    Through our stores and mail order pharmacy facilities like this one, CVS is uniquely positioned to offer payors flexible solutions to help control costs. 7

  • Page 10
    ..., and community engagement. Recipients included the University of Miami Sickle Cell Center, the National Children's Cancer Society, the Down Syndrome Resource Center of New York, the AIDS Taskforce of Greater Cleveland, Goodwill Industries of Houston, and the Literacy Coalition of South Alabama...

  • Page 11
    The Windy City Kids Child Development Center is one of many organizations through which CVS colleagues help our communities across America. 9

  • Page 12
    ... the time it takes to get products from the delivery truck to store shelves. When our new Central Florida distribution center opens in late 2006, it will incorporate the same technology. At the store level, the EPIC system has improved pharmacy workflow and cut costs, while our Assisted Inventory...

  • Page 13
    The first of its kind in North America, our highly efficient distribution center in Ennis, Texas, makes it "CVS easy" to keep our stores well-stocked. 11

  • Page 14
    ... Eckerd assets, sales rose 15.1 percent to a record $30.59 billion. Diluted earnings per share were $2.20, including a one-time, non-cash tax benefit of 14.5 cents as well as a one-time, non-cash negative adjustment of 10 cents relating to a change in accounting practices for leases. The acquisition...

  • Page 15
    Chairman, President, and CEO Tom Ryan Investors have responded enthusiastically to our ongoing success and to our prospects following the acquisition. CVS stock produced a 25.5 percent total return to shareholders in 2004. That number far exceeded the returns of the S&P 500 Index, the S&P Retail ...

  • Page 16
    ... percent. With the acquired stores, retail square footage increased 33 percent. Virtually all our net growth took place in newer CVS markets such as Texas, Florida, Phoenix, Las Vegas, and Chicago. We opened our first stores in Los Angeles and Orange County, California, as well as Minneapolis. All...

  • Page 17
    ... to further improve our customer experience. Robust pipeline and new generics to help drive future growth 1675 We are seeing a temporary slowdown in industry prescription growth, which is due to a number of factors. They include the slow pace of new drug approvals, 804 higher co-pays and growing...

  • Page 18
    ... to work hard around the clock, putting your capital to its best possible use. Thank you for investing in CVS. Thomas M. Ryan Chairman of the Board, President, and Chief Executive Officer March 8, 2005 CVS/pharmacy Retail Markets Expanding Our Reach Five years ago, CVS/pharmacy stores filled...

  • Page 19
    ... Results of Operation Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes...

  • Page 20
    ...on the final working capital of the Acquired Businesses as of the closing date. The Company anticipates that the adjustment to the purchase price will be finalized during fiscal 2005. The Company obtained funding for the acquisition through a combination of cash and commercial paper and subsequently...

  • Page 21
    ...in future programs, we may not be able to sustain our current rate of sales growth and gross margin dollars could be adversely impacted. Total operating expenses, which include store and merchandise sold during the reporting period and the related purchasing costs, warehousing costs, delivery costs...

  • Page 22
    ... inventory payments as a result of higher inventory levels, and higher operating costs associated with the Acquired Businesses and investments in extending store hours. The elevated inventory levels are primarily the result of inventory purchased to reset the acquired stores with the CVS/pharmacy...

  • Page 23
    ... our capital structure and financial policies as well as our consolidated balance sheet, the acquisition of the Acquired Businesses and other financial information. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs. OFF...

  • Page 24
    ...disposition of any of the corporate level lease guarantees will not have a material adverse effect on our consolidated financial condition, results of operations or future cash flows. We issue letters of credit for insurance programs and import purchases. The fair value of the outstanding letters of...

  • Page 25
    ... store's historical results and current operating trends and our consolidated sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including, but not limited to, general economic conditions, the cost of real estate, the continued efforts...

  • Page 26
    ... exclusively through mail order pharmacies; Our ability to integrate successfully and improve significantly the operating results of the Acquired Businesses in accordance with plan; Increased competition from other drugstore chains, supermarkets, discount retailers, membership clubs and internet...

  • Page 27
    ... into actual events, these developments could have material adverse effects on the Company's business, financial condition and results of operations. For these reasons, you are cautioned not to place undue reliance on the Company's forward-looking statements. CVS Corporation 2004 Annual Report | 25

  • Page 28
    ...testing of the operating effectiveness of controls. Our system of internal control over financial reporting is enhanced by periodic reviews by our internal auditors and independent registered public accounting firm, written policies and procedures and a written Code of Conduct adopted by our Company...

  • Page 29
    ...'s assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and...

  • Page 30
    ...general and administrative expenses Depreciation and amortization Total operating expenses Operating profit Interest expense, net Earnings before income tax provision Income tax provision Net earnings Preference dividends, net of income tax benefit Net earnings available to common shareholders BASIC...

  • Page 31
    ... Common stock, par value $0.01: authorized 1,000,000,000 shares; issued 414,276,000 shares at January 1, 2005 and 410,187,000 shares at January 3, 2004 Treasury stock, at cost: 13,317,000 shares at January 1, 2005 and 14,803,000 shares at January 3, 2004 Guaranteed ESOP obligation Capital surplus...

  • Page 32
    ... preference stock Employee stock purchase plan issuance End of year GUARANTEED ESOP OBLIGATION: Beginning of year Reduction of guaranteed ESOP obligation End of year CAPITAL SURPLUS: Beginning of year Conversion of preference stock Stock option activity and awards Tax benefit on stock options and...

  • Page 33
    ... taxes and other non-cash 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 Accrued expenses Other long-term liabilities NET CASH PROVIDED BY OPERATING...

  • Page 34
    ... its CVS/pharmacy® retail stores and online through CVS.com.® The Company also provides pharmacy benefit management, mail order services and specialty pharmacy services through PharmaCare Management Services and PharmaCare Pharmacy® stores. As of January 1, 2005, the Company operated 5,375 retail...

  • Page 35
    .... See Note 3 for further information on goodwill. Intangible assets- Purchased customer lists are amortized on than capital expenditures, are charged directly to expense when incurred. When the Company closes a store, the present value of estimated unrecoverable costs, including the remaining lease...

  • Page 36
    ... Stock Ownership Plan ("ESOP") preference dividends, by (ii) the weighted average number of common shares outstanding during the year (the "Basic Shares"). income taxes currently payable, as well as for those deferred because of timing differences between reporting income and expenses for financial...

  • Page 37
    ...on the final working capital of the Acquired Businesses as of the closing date. The Company anticipates that the adjustment to the purchase price will be finalized during fiscal 2005. The Company obtained funding for the acquisition through a combination of cash and commercial paper and subsequently...

  • Page 38
    ... future: In millions, except per share amounts Goodwill represents the excess of the purchase price over the fair value of net assets acquired. The Company accounts for goodwill and intangibles under SFAS No. 142, "Goodwill and Other Intangible Assets." As such, goodwill and other indefinite-lived...

  • Page 39
    ...any time, in whole or in part at a defined redemption price plus accrued interest. 5 Leases The Company leases most of its retail locations and eight of its distribution centers under non-cancelable operating leases, whose initial terms typically range from 15 to 25 years, along with options that...

  • Page 40
    ...-line basis over the term of the lease. In addition to minimum rental payments, certain leases require additional payments based on sales volume, as well as reimbursements for real estate taxes, maintenance and insurance. Following is a summary of the Company's net rental expense for operating...

  • Page 41
    ...to certain union-administered pension and health and welfare plans that totaled $15.0 million in 2004, $13.2 million in 2003 and $12.1 million in 2002. The Company also has nonqualified supplemental executive retirement plans in place for certain key employees for whom it has purchased cost recovery...

  • Page 42
    ... - $ 0.6 Service cost Interest cost on benefit obligation Expected return on plan assets Amortization of net loss (gain) Amortization of prior service cost Settlement gain Net periodic pension cost ACTUARIAL ASSUMPTIONS: Discount rate Expected return on plan assets(1) Rate of compensation increase...

  • Page 43
    ...the Directors Plan. The ICP provides for the granting of up to 42.9 million shares of common stock in the form of stock options and other awards to selected officers and employees of the Company. All grants under the ICP are awarded at fair market value on the date of grant. Options granted prior to...

  • Page 44
    ... the Black-Scholes Option Pricing Model with the following assumptions: 2004 Dividend yield Expected volatility Risk-free interest rate Expected life 0.65% 30.50% 3.9% 6.6 2003 0.85% 29.63% 3.5% 7.0 2002 0.96% 29.50% 4.0% 7.0 The 1999 Employee Stock Purchase Plan provides for the purchase of up to...

  • Page 45
    ... members of the CVS Board of Directors and certain unnamed fiduciaries. The Company believes the ERISA Action is entirely without merit and intends to defend the action vigorously. On December 17, 2004, Richard Krantz filed a shareholder derivative suit under the caption Krantz v. Ryan, et. al...

  • Page 46
    .... 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 organizations. These services include mail order pharmacy services, specialty pharmacy services, plan design...

  • Page 47
    ...per common share Stock price: (New York Stock Exchange) High Low Registered shareholders at year-end 2003: 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...

  • Page 48
    ... Inc. to fund future charitable giving, and (iii) in 2000, $19.2 million ($11.5 million after-tax) non-recurring gain representing partial payment of the Company's share of the settlement proceeds from a class action lawsuit against certain manufacturers of brand-name prescription drugs. (5) In 2004...

  • Page 49
    ... accounting principles generally accepted in the United States of America. We also have audited, in accordance with the Public Company Accounting Oversight Board (United States), the effectiveness of CVS Corporation's internal control over financial reporting as of January 1, 2005, based on criteria...

  • Page 50
    ...PharmaCare Chairman of the Board, President and Chief Executive Officer CVS Corporation Financial and Other Company Information The Company's Annual Report on Form 10-K will be sent without charge to any shareholder upon request by contacting: Nancy R. Christal Vice President-Investor Relations CVS...

  • Page 51
    ..., healthier, happier lives. OUR MISSION We will be the easiest pharmacy retailer for customers to use. OUR VALUES FOR SUCCESS Respect for individuals Integrity Teamwork Openness to new ideas Commitment to flawless execution Passion for extraordinary customer service It's all in a day's work.

  • Page 52
    CVS Corporation One CVS Drive, Woonsocket, RI 02895 http://investor.cvs.com