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CVS CORPORATION ANNUAL REPORT
At CVS, All Signs Point to Growth
2005

Table of contents

  • Page 1
    At CVS, All Signs Point to Growth CVS CORPORATION ANNUAL REPORT 2005

  • Page 2
    ... to being the easiest pharmacy for customers to use. Our 148,000 colleagues work hard so that everyone can "expect something extra" whether entering one of our stores, shopping at CVS.com, or using PharmaCare's services. Our company trades on the New York Stock Exchange under the ticker "CVS."

  • Page 3
    ... and beyond The nation's largest pharmacy chain by store count, we were operating 5,420 CVS/pharmacy® locations by year-end plus 51 PharmaCare specialty pharmacies. We opened many of our new stores in important growth markets such as Chicago, Minneapolis, Las Vegas, Los Angeles, Orange County, and...

  • Page 4
    ... gains. The Medicare Part D Prescription Drug Plan, launched in January 2006, should increase usage of pharmaceuticals over time by making them more affordable for seniors. Some 42 million Medicare beneficiaries are eligible for the new plan, and we've worked 2 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 5
    ...a state-of-the-art specialty mail order facility. During 2005, PharmaCare announced a strategic alliance with Universal American Financial Corp., a leading health insurance company, under which PharmaCare will provide a full array of PBM services to Universal American-sponsored Medicare prescription...

  • Page 6
    ...left a legacy that will help guide our company well into the future. In closing, the bright opportunities before us mean that all signs point to growth for CVS. We expect to reap multi-year benefits from the turnaround of our acquired properties. Our retail pharmacies will leverage our leadership in...

  • Page 7
    ... in 2006, we will have the No. 1 or No. 2 share in 75 percent of the top 100 U.S. drugstore markets in which we operate. Moreover, CVS/pharmacy will gain a leadership position in fast-growing Southern California and a stronger presence in key states, including Arizona, Illinois, Indiana, Missouri...

  • Page 8
    6 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 9
    ... to IMS Health, pharmacy sales are expected to continue growing at a 5 to 8 percent compound annual rate. The increased use of pharmaceuticals as the first line of defense in health care, the introduction of new and better drug therapies, and an aging population requiring more prescription drugs are...

  • Page 10
    8 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 11
    ...locations, such merchandise now accounts for 12 percent of total sales, up from 8 percent just a year ago. Consumers are already embracing some of our newest CVS brand and exclusive offerings, including the Life Fitness® line of vitamins and, in the beauty aisle, Skin Effects® by Dr. Jeffrey Dover...

  • Page 12
    10 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 13
    ... 2005, and our growth in this area is outpacing food, drug, and mass retailers as a whole. That's critical because the pharmacy generates 70 percent of total CVS sales. Our 2004 acquisition of more than 1,100 Eckerd stores, primarily in Florida and Texas, has vaulted us into key leadership positions...

  • Page 14
    12 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 15
    ... the CVS/pharmacy beauty care aisle from one found in a department store. Except when it comes to cost, of course. That's because we offer premium-quality brands, such as Finland's Lumene®, at prices that don't break the bank. We continue to be first-to-market with exciting new products...

  • Page 16
    14 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 17
    .... Universal American Financial Corp. has tapped PharmaCare to provide a full array of PBM services on an exclusive basis for its Medicare plans. PharmaCare is responsible for claims processing, network contracting, formulary management, disease management, mail order, and specialty pharmacy services...

  • Page 18
    Our Vision We help people live longer, healthier, happier lives. Our Mission We will be the easiest pharmacy retailer for customers to use. Respect for individuals Integrity Teamwork Openness to new ideas Commitment to flawless execution Passion for extraordinary customer service Our Values for...

  • Page 19
    ...Results of Operations 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
    ...-counter drugs, beauty products and cosmetics, film and photofinishing services, seasonal merchandise, greeting cards and convenience foods through our CVS/pharmacy ® retail stores and online through CVS.com.® We also provide pharmacy benefit management, mail order services and specialty pharmacy...

  • Page 21
    ... by the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants on February 7, 2005. As a result, we recorded a $65.9 million non-cash pre-tax adjustment to total operating expenses, which represents the cumulative effect of...

  • Page 22
    ... a new distribution center in Florida, which is expected to be completed during 2006. During 2006, we currently plan to invest over $1.4 billion in gross capital expenditures, which will include spending for approximately 250 -275 new or relocated stores. 20 CVS CORPORATION 2005 ANNUAL REPORT

  • Page 23
    ... sheet 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. Subsequent to our entry into the definitive agreement with Albertson's in January 2006, Standard & Poor's placed our long-term...

  • Page 24
    ... additional information regarding stock-based compensation. In October 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") Self-Insurance Liabilities We are self-insured for certain losses related to general liability, workers' compensation and auto liability...

  • Page 25
    ... in 2006 of a new Medicare prescription drug benefit and the continued efforts by various government entities to reduce state Medicaid pharmacy reimbursement rates; The growth of mail order pharmacies and changes to pharmacy benefit plans requiring maintenance medications to be filled exclusively...

  • Page 26
    .... Their accompanying report is based upon an audit conducted in accordance with the Public Company Accounting Oversight Board (United States) and includes an attestation on management's assessment of internal controls over financial reporting. March 14, 2006 24 CVS CORPORATION 2005 ANNUAL REPORT

  • Page 27
    ... over financial reporting as of December 31, 2005, based on criteria established in Internal Control- Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS...

  • Page 28
    ...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...815.4 $ 0.1450 $ 0.1325 $ 0.1150 26 CVS CORPORATION 2005 ANNUAL REPORT

  • Page 29
    CONSOLIDATED BALANCE SHEETS In millions, except shares and per share amounts Dec. 31, 2005 Jan. 1, 2005 Assets: Cash and cash equivalents Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Goodwill Intangible assets, ...

  • Page 30
    ... of 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...

  • Page 31
    ... 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 32
    ...-the-counter drugs, beauty products and cosmetics, film and photofinishing services, seasonal merchandise, greeting cards and convenience foods, through its CVS/pharmacy ® retail stores and Pharmacy ® ® The Company also provides pharmacy benefit management, mail order services online through CVS...

  • Page 33
    ... million after-tax) as of January 1, 2005. STOCK-BASED COMPENSATION -The Company accounts for its stock-based compensation plans under compensation and automobile liability. The Company obtains third party insurance coverage to limit exposure from these claims. The Company is also self-insured for...

  • Page 34
    ...2005, $10.4 million in 2004 and $11.0 million in 2003. INCOME TAXES -The Company provides for federal and state income taxes currently payable, as well as difference between the dividends on the ESOP preference stock and common stock and after making adjustments for the incentive compensation plans...

  • Page 35
    ... for the estimated costs associated with the non-cancelable lease obligations of 302 Eckerd locations that the Company does not intend to operate. As of December 31, 2005, 275 of these locations have been closed and $100.8 million of this liability has been settled with cash payments. The $264...

  • Page 36
    ... of interest expense over the life of the related long-term financing. As of December 31, 2005, the Company had no freestanding derivatives in place. The credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. The covenants do not materially...

  • Page 37
    ... and life insurance benefits to certain retirees who meet eligibility requirements. The Company's funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the Company reviews external data and its own historical trends for healthcare costs to...

  • Page 38
    ... executive retirement plans in place for certain key employees for whom it has purchased cost recovery variable life insurance. The Company uses an investment strategy, which emphasizes equities in order to produce higher expected returns, and in the long run, lower expected expense and cash...

  • Page 39
    ... costs. The minimum pension liability adjustment is reflected in other long-term liabilities, long-term deferred income taxes and accumulated other comprehensive loss, which is included in shareholders' equity, in the accompanying consolidated balance sheets. 7 Stock Incentive Plans The Company...

  • Page 40
    ... non-employee directors to receive awards under the ICP. Upon approval of this amendment to the ICP, all authority to make future grants under the Company's 1996 Directors Stock Plan was terminated, although previously granted awards remain outstanding in accordance with their terms and the terms...

  • Page 41
    ... the respective years: In millions 2005 2004 2003 8 Employee Stock Ownership Plan The Company sponsors a defined contribution Employee Stock Ownership Plan (the "ESOP") that covers full-time employees with at least one year of service. Current: Federal State Deferred: $ 632.8 31.7 664.5 $ 397...

  • Page 42
    ...to the SEC staff's requests. In December 2005, the Audit Committee of the Company's Board of Directors engaged independent outside counsel to undertake an internal review of the matter (the "Internal Review"). In March 2006, based on the findings from the Internal Review, the Audit Committee reached...

  • Page 43
    ... resources and in assessing performance. As of December 31, 2005, the Retail Pharmacy segment included 5,420 retail drugstores and the Company's online retail website, CVS.com.® The retail drugstores are located in 34 states and the District of Columbia and operate under the CVS® or CVS/pharmacy...

  • Page 44
    ..."). Approximately half of the drugstores are located in southern California, with others in the Company's existing markets in numerous states across the Midwest and Southwest. The Company will also acquire Albertson's owned real estate interests in the 42 CVS CORPORATION 2005 ANNUAL REPORT

  • Page 45
    ...millions, except per share amounts 2005: Net sales Gross margin Operating profit Net earnings(2) Net earnings per common share, basic(2) Net earnings per common share, diluted(2) Dividends per common share Stock price: (New York Stock Exchange) High Low Registered shareholders at year-end 2004: Net...

  • Page 46
    ... for operating leases and leasehold improvements to the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants on February 7, 2005. As a result, the Company recorded a non-cash pre-tax adjustment of...

  • Page 47
    ... of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. KPMG LLP Providence, Rhode Island March 14, 2006 CVS CORPORATION 2005 ANNUAL REPORT 45

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  • Page 50
    ... President CVS Realty Co. Marian L. Heard(1)(2)(3) President and Chief Executive Officer Oxen Hill Partners Transfer Agent and Registrar Questions regarding stock holdings, certificate replacement/transfer, dividends and address changes should be directed to: The Bank of New York Shareholder...

  • Page 51
    ... and supplies and set up mobile pharmacy operations in Texas for evacuees at the Houston Astrodome, the Convention Center in Austin, and Kelly Air Force Base in San Antonio. As always, CVS remains committed to higher education. We provide scholarship funding to dozens of pharmacy schools and to the...

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