Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 1-1011
CVS CORPORATION
(Exact name of Registrant as specified in its charter)
--------------------
Delaware 05-0494040
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One CVS Drive 02895
Woonsocket, Rhode Island -----
------------------------ (Zip Code)
(Address of principal executive offices)
(401) 765-1500
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock* held by
non-affiliates** of the registrant (without admitting that any person whose
shares are not included in this calculation is an affiliate) on March 17, 1999
was approximately $19,895,631,210, based on the closing price on the New York
Stock Exchange.
As of March 17, 1999, the registrant had 390,601,264 shares of common stock
outstanding.
* Does not include 5,224,367 outstanding shares of Series One ESOP
Convertible Preference Stock. As of March 17, 1999, each share of ESOP
Preference Stock was entitled to 2.3 votes per share on all matters
submitted to a vote of the holders of common stock, voting with the common
stock as a single class.
** Only voting stock held by directors and executive officers is excluded.
---------------------------
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or specified parts thereof) are incorporated by
reference into this Annual Report on Form 10-K as indicated: CVS Corporation's
1998 Annual Report to Shareholders is incorporated by reference into Part II:
Items 5, 6, 7 and 8 and Part IV: Item 14 and CVS Corporation's 1999 Proxy
Statement is incorporated by reference into Part III: Items 10, 11, 12 and 13.
================================================================================
TABLE OF CONTENTS
Part I Page
----
Item 1: Business
Overview of CVS' Business.................................................................. 2
Strategic Restructuring Program............................................................ 2
Merger with Revco D.S., Inc................................................................ 3
Merger with Arbor Drugs, Inc............................................................... 3
PharmaCare................................................................................. 3
Relationships with Managed Care Providers.................................................. 4
CVS Stores................................................................................. 4
Store Development.......................................................................... 4
Information Systems........................................................................ 5
Relationships with Suppliers............................................................... 6
Customer Service........................................................................... 6
Government Regulation...................................................................... 6
Competition................................................................................ 7
Cautionary Statement Concerning Forward-Looking Statements................................. 7
Item 2: Properties.................................................................................... 8
Item 3: Legal Proceedings............................................................................. 9
Item 4: Submission of Matters to a Vote of Security Holders........................................... 9
Executive Officers of the Registrant .................................................................... 9
Part II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters......................... 10
Item 6: Selected Financial Data....................................................................... 10
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations......... 10
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.................................... 10
Item 8: Financial Statements and Supplementary Data................................................... 10
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 10
Part III
Item 10: Directors and Executive Officers of the Registrant............................................ 11
Item 11: Executive Compensation........................................................................ 11
Item 12: Security Ownership of Certain Beneficial Owners and Management................................ 11
Item 13: Certain Relationships and Related Transactions................................................ 11
Part IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 12
Where You Can Find More Information...................................................................... 15
Independent Auditors' Report............................................................................. 16
Schedule II - Valuation and Qualifying Accounts.......................................................... 17
Signatures .............................................................................................. 18
1
PART I
ITEM 1. BUSINESS
- ------------------------------ -------------------------------------------------
Overview of CVS' CVS Corporation is a leader in the chain drugstore industry
Business in the United States, with revenues of $15.3 billion in
1998. As of December 31, 1998, we were the largest drugstore
chain in the nation in terms of store count, operating 4,122
stores in 24 states in the Northeast, Mid-Atlantic, Midwest
and Southeast regions and in the District of Columbia. Our
stores are well positioned and operate in 66 of the top 100
drugstore markets in the country. We now hold the number one
market share in six of the top ten drugstore markets. We are
also among the industry leaders in terms of store
productivity and operating profit margin.
Pharmacy Operations ~ A primary focus of our operations is
our pharmacy business. In 1998, total pharmacy sales
increased 17.0% to $8.8 billion, representing 58% of total
sales for the year, compared to 55% of total sales in 1997.
As of December 31, 1998, we were the largest drugstore chain
in the nation in terms of prescriptions filled and pharmacy
sales, dispensing over 251 million prescriptions
(approximately 10.5% of the U.S. retail prescription
market). We believe that our pharmacy operations will
continue to represent a critical part of our business and
strategy due to favorable trends. These trends include an
aging American population, greater responsibility being
borne by Americans for their healthcare, an increasing
demand for retail formats that provide easy access and
convenience, discovery of new and better drug therapies and
the need for cost effective healthcare solutions.
Our pharmacy business also benefits from an "independent
file buy" program, in which we purchase prescription files
from independent pharmacies. During 1998, we purchased
approximately 350 prescription files, each containing an
average weekly prescription count of nearly 560. We believe
that independent file buys are productive investments. In
many cases, the independent pharmacist will move to CVS,
thereby providing continuity in the pharmacist-patient
relationship.
Front Store Operations ~ In addition to prescription drugs
and services, we offer a broad selection of general
merchandise, presented in a well-organized fashion, in
stores that are designed to be customer-friendly, inviting
and easy to shop. Merchandise categories include:
over-the-counter drugs, greeting cards, film and
photofinishing services, beauty and cosmetics, seasonal
merchandise and convenience foods. We also offer over 1,400
products under the CVS private label brand, which
represented about 11% of our front store sales in 1998. In
1998, front store sales, which are generally higher margin
than pharmacy sales, increased 3.9% to $6.5 billion,
representing 42% of total sales for the year, compared to
45% of total sales in 1997.
CVS Corporation is a Delaware corporation. Our principal
executive offices are located at One CVS Drive, Woonsocket,
Rhode Island 02895, telephone (401) 765-1500. As of December
31, 1998, CVS and its subsidiaries had about 97,000
employees.
Strategic In November 1997, we completed the final phase of our
Restructuring comprehensive strategic restructuring program, first
Program announced in October 1995 and subsequently refined in May
1996 and June 1997. The strategic restructuring program
included: (i) the sale of Marshalls, Kay-Bee Toys, Wilsons,
This End Up and Bob's Stores, (ii) the spin-off of Footstar,
Inc., which included Meldisco, Footaction and Thom McAn,
(iii) the initial and secondary public offerings of Linens
`n Things and (iv) the elimination of certain corporate
overhead costs.
For more information about our strategic restructuring
program, see Note 4 of "Notes to Consolidated Financial
Statements" on page 30 of our 1998 Annual Report to
Shareholders that is incorporated by reference into Item 8
"Financial Statements and Supplementary Data."
2
Merger with On May 29, 1997, we completed a merger with Revco D.S. Inc.,
Revco D.S., Inc. 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 CVS common stock. The
merger of CVS and Revco was a tax-free reorganization that
we treated as a pooling of interests for accounting
purposes. 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.
Merger with On March 31, 1998, we completed a merger with Arbor Drugs,
Arbor Drugs, Inc. Inc., 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 CVS common stock. The
merger of CVS and Arbor was also a tax-free reorganization
that we treated as a pooling of interests for accounting
purposes. 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
drugstore market and strengthened our position as the
nation's top drugstore retailer in terms of store count and
retail prescriptions dispensed.
PharmaCare In order to provide patients with the best possible care at
the lowest cost, we follow an integrated healthcare approach
that brings together industry participants such as
physicians, pharmaceutical companies, managed care providers
and pharmacies. Our primary efforts in this area include the
operation and expansion of PharmaCare, our prescription
benefit management subsidiary, and the creation of strategic
alliances with healthcare partners.
PharmaCare 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 pharmacy services, claims
processing and generic substitution. In December 1997,
PharmaCare strengthened its services network by merging with
Revco's prescription benefit management subsidiary, Rx
Connections, and assuming Revco's mail order pharmacy
operations. At the end of 1998, PharmaCare managed
healthcare services for about 6 million people through a
preferred national pharmacy network of over 40,000
pharmacies. In addition, PharmaCare plays an increasing role
in healthcare management through integrated partnerships
with several large managed care providers.
One feature that sets PharmaCare apart from other
prescription benefit management providers is its proprietary
Clinical Information Management System ("CIMS"). CIMS is a
unique communication system that links physicians, patients
and pharmacists to facilitate clinical management. It is a
leading formulary management tool for directing utilization
to the most clinically appropriate and cost-effective
medications. More than 30,000 physicians are currently using
CIMS, which began with only 500 physicians in 1994.
Relationships with The growth in managed care has substantially increased the
Managed Care use of prescription drugs. Managed care providers have (i)
Providers made the cost of prescription drugs more affordable to a
greater number of people and (ii) supported prescription
drug therapy as an alternative to more expensive forms of
treatment, such as surgery. Payments by third party
providers under prescription drug plans represented 84% of
total pharmacy sales in 1998, compared to 81% in 1997.
3
In a typical third party payment plan, we contract with a
third party payor (such as an insurance company, a
prescription benefit management company, a governmental
agency, a private employer, a health maintenance
organization or other managed care provider) that agrees to
pay for all or a portion of a customer's eligible
prescription purchases in exchange for reduced prescription
rates. Although third party payment plans provide a high
volume of prescription drug sales, these sales typically
generate lower gross margins than other sales due to the
cost containment efforts of third party payors and the
increasing competition among pharmacies for this business.
The cost containment efforts and increased competition has
also caused a continued decline of gross margins on third
party sales. To address this trend, we have dropped a number
of third party programs that fell below our minimum
profitability standards. In the event this trend continues
and we elect to drop additional programs and/or decide not
to participate in future programs that fall below our
minimum profitability standards, we may not be able to
sustain our current rate of sales growth.
CVS Stores We are the nation's largest chain drugstore company based on
store count, operating 4,122 stores in 24 states and the
District of Columbia as of December 31, 1998. The majority
of our existing stores range in size from approximately
8,000 to 10,000 square feet, although most new stores are
based on our 10,125 square foot freestanding prototype,
which typically includes a drive-thru pharmacy.
As of December 31, 1998, 23% of our stores were freestanding
as opposed to being located in strip shopping center sites.
Over 700 CVS stores were operated on an extended hour or
24-hour basis and 900 stores offered one-hour photo service.
We also operated 360 stores with drive-thru pharmacies, and
plan to add over 400 more in 1999. During 1998, we opened
382 new stores, including 198 relocations, and in 1999 we
expect to open approximately 440 new stores, including about
300 relocations. Net selling space for our 4,122 stores was
30.6 million square feet at the end of 1998.
The following is a breakdown by state of the locations of
CVS stores at December 31, 1998:
---------------------------------------- ----------------------------------------
Alabama............................144 New Hampshire....................29
Connecticut........................122 New Jersey......................183
Delaware.............................3 New York........................363
District of Columbia................47 North Carolina..................296
Florida.............................22 Ohio............................414
Georgia............................304 Pennsylvania....................319
Illinois............................70 Rhode Island.....................52
Indiana............................291 South Carolina..................196
Kentucky............................71 Tennessee.......................146
Maine...............................20 Vermont...........................2
Maryland...........................170 Virginia........................253
Massachusetts......................321 West Virginia....................59
Michigan..........................225
---------------------------------------- ----------------------------------------
Store Development The addition of new stores has played, and will continue to
play, a major role in our continued growth. As we open new
stores, we maintain our objective of securing a strong
position in each market that our stores serve. Our strong
market positions provide us with several important
advantages, including (i) an ability to save on advertising
and distribution costs and (ii) an ability to attract
managed care providers, who want to provide their members
with convenient access to pharmacy services.
4
In addition, we are actively seeking to relocate many of our
strip shopping center locations to freestanding sites. We
expect that relocations of existing shopping center stores
to freestanding locations will account for about two-thirds
of store openings over the next several years. Because of
their more convenient locations and larger size, relocated
stores have typically realized significant improvements in
customer count and revenues, driven largely by increased
sales of higher margin front store merchandise. We believe
our relocation program offers a significant opportunity for
future growth as approximately 23% of our existing stores
are freestanding. We currently expect to have approximately
35% of our stores in freestanding locations by the end of
1999. Our long-term goal is to have 70-80% of our stores
located in freestanding sites. We cannot, however, guarantee
that future store relocations will achieve similar results
as those historically achieved. See "Cautionary Statement
Concerning Forward-Looking Statements" below.
We also have an active remodeling and remerchandising
program which seeks to remodel 20% of our existing stores
and remerchandise another 20% each year. During 1998, we
also completed the process of converting all 1,900 retained
Revco stores into the CVS store format, converted Arbor
stores to CVS' accounting and store systems and closed
Arbor's Troy, Michigan corporate headquarters facility.
We believe that continuing to grow our store base and
locating stores in desirable geographic markets are
essential components to competing effectively in the current
managed care environment. As a result, we believe that our
store development program is an important part of our
ability to maintain our leadership position in the chain
drugstore industry.
Information Systems We have invested significantly in information systems to
enable us to deliver an exceptional level of customer
service while lowering costs and increasing operating
efficiency. Our client-server based systems permit rapid and
flexible system development to meet changing business needs,
while our scaleable technical architecture enables us to
efficiently expand our network to accommodate new stores.
Pharmacy Systems ~ The Rx2000 computer system enables our
pharmacists to fill prescriptions more efficiently, giving
the pharmacists more time to spend with customers. The
system facilitates the management of third party healthcare
plans and enables us to provide managed care providers with
a level of information which we believe is unmatched by our
competitors. By analyzing the data captured by the Rx2000
computer system, we and our managed care partners are able
to evaluate treatment outcomes with an eye toward improving
care and containing costs.
We also continue to make significant progress on our next
generation Rx2000 Pharmacy Delivery System, which will
reengineer the way we fill prescriptions. The project
includes integrated workflow improvements and automated
pill-counting machines in high volume stores.
During 1997, we implemented Rapid Rx Refill, which enables
customers to order prescription refills 24 hours a day using
a touch-tone telephone. In just over 18 months after its
debut, Rapid Rx Refill now accounts for approximately 50% of
refills.
Overall, these initiatives are expected to continue to
enhance pharmacy productivity, lower the costs to fill
prescriptions and improve service by enabling our
pharmacists to spend more time with customers.
5
Front Store Systems ~ Our point-of-sale scanning technology
has enabled us to develop an advanced retail data warehouse
of information. We use this information to quickly analyze
data on a store-by-store basis to develop targeted marketing
and merchandising strategies. We can also analyze the impact
of pricing, promotion and mix on a category's sales and
profitability, enabling us to develop tactical merchandising
plans for each category by market. We believe that effective
category management increases customer satisfaction and that
our category management approach has been a primary factor
in front store comparable sales gains and improved gross
margins.
We are also beginning the final phase of a multi-year supply
chain initiative which will transform the way we receive,
distribute and sell merchandise. Our supply chain
initiatives will more effectively link our stores and
distribution centers with suppliers to speed the delivery of
merchandise to our stores in a manner that both reduces
out-of-stock positions and lowers our investment in
inventory. The first two phases focused on improving
category management and maximizing gross profit through
price elasticity and promotional allocations. The final
phase will help us to more effectively tailor our product
mix in specific markets. We have already begun to experience
tangible benefits from our supply chain initiatives and we
expect to continue to do so.
Relationships with We centrally purchase most of our merchandise, including
Suppliers prescription drugs, directly from manufacturers. This
purchasing strategy allows us to take advantage of the
promotional and volume discount programs that certain
manufacturers offer to retailers. During 1998, about 85% of
the merchandise purchased by us was received by one of our
distribution centers for redistribution to our stores. The
balance of our store merchandise is shipped directly to our
stores from manufacturers and distributors at prices
negotiated at the corporate level. We believe that the loss
of any one supplier or group of suppliers under common
control would not materially affect our business.
Customer Service We strive to provide the highest levels of service to our
customers and partners. As a result, we devote considerable
time and attention to people, systems and service standards.
We emphasize attracting and training friendly and helpful
associates to work in our stores and throughout our
organization. Each CVS store receives a formal customer
service evaluation twice per year, based on a mystery
shopper program, customer letters and calls, and market
research. Our priority on customer service extends into the
managed care portion of our business as well. In every
market, a Managed Care Service Team ensures that managed
care partners receive high levels of service. Our
pharmacists consistently rank among the best in the industry
on measurements of trust, relationship-building and
accessibility. This high level of service and expertise has
played a key role in the growth of our pharmacy operations.
Government Our pharmacies and pharmacists must be licensed by the
Regulation appropriate state boards of pharmacy. Our pharmacies and
distribution centers are also registered with the Federal
Drug Enforcement Administration. Because of these licensing
and registration requirements, we must comply with various
statutes, rules and regulations, a violation of which could
result in a suspension or revocation of these licenses or
registrations. Under the Omnibus Budget Reconciliation Act
of 1990, our pharmacists are required to offer counseling,
without charge, to customers covered by Medicare about
medication, dosage, delivery system, potential side effects
and other information deemed significant by our pharmacists.
Our pharmacists routinely offer such counseling to all
customers.
We also market products under various trademarks and
tradenames which have been registered in the United States.
Our rights in these trademarks endure for as long as they
are used or registered.
6
Competition The retail drugstore business is highly competitive. We
believe that we compete principally on the basis of: (i)
store location and convenience, (ii) customer service and
satisfaction, (iii) product selection and variety and (iv)
price. We experience active competition not only from
independent and other chain drugstores, but also from health
maintenance organizations, hospitals, mail order
organizations, supermarkets, discount drugstores and
discount general merchandisers. The deep discount drug
segment has grown significantly over the past several years
as drug chains, and food, discount and specialty retailers
have entered the business. Major retail companies now
operate deep discount drugstores in the most competitive
retailing markets. "Combo" stores, which consist of grocery,
drugstore and several other operations under the same roof,
have also grown significantly over the past several years as
consumers have become more attracted to one-stop shopping.
Retail mass merchandisers with prescription departments have
also grown in popularity.
Cautionary In this report and in the documents incorporated by
Statement Concern- reference (as well as in other public filings, press
ing Forward- releases and oral statements made by Company management), we
Looking Statements make forward-looking statements about future events that
have not yet happened. These statements are subject to risks
and uncertainties. Forward-looking statements include
information concerning:
o our future results of operations, cost savings and
synergies following the Revco and Arbor mergers;
o our ability to elevate the performance level of Revco
stores following the Revco merger;
o our ability to continue to achieve significant sales
growth;
o our belief that we can continue to improve operating
performance by relocating existing in-line stores to
freestanding locations;
o our ability to continue to reduce selling, general and
administrative expenses as a percentage of net sales;
and
o the ability of the Company and our key vendors and
suppliers to successfully manage issues presented by
the Year 2000.
In addition, statements that include the words "believes",
"expects", "anticipates", "intends", "estimates" or similar
expressions are forward-looking statements. For all of these
statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
You should understand that the following important factors,
in addition to those discussed elsewhere in this report and
in the documents which are incorporated by reference (and in
our other public filings, press releases and oral statements
made by Company management), could affect the future results
of CVS and could cause those results to differ materially
from those expressed in the forward-looking statements:
What Factors Could Affect the Outcome of Our Forward-Looking
Statements?
Industry and Market Factors
o changes in economic conditions generally or in the
markets served by CVS;
o future federal and/or state regulatory and legislative
actions affecting CVS and/or the chain drugstore
industry;
o consumer preferences and spending patterns;
7
o competition from other drugstore chains, from
alternative distribution channels such as supermarkets,
membership clubs, mail order companies and internet
companies (e-commerce) and from other third party
plans; and
o the continued efforts of health maintenance
organizations, managed care organizations, pharmacy
benefit management companies and other third party
payors to reduce prescription drug costs.
Operating Factors
o our ability to combine the businesses of CVS, Revco and
Arbor and maintain current operating performance levels
during the integration period(s) and the challenges
inherent in diverting the Company's management focus
and resources from other strategic opportunities and
from operational matters for an extended period of time
during the integration process(es);
o our ability to implement new computer systems and
technologies;
o our ability to continue to secure suitable new store
locations on favorable lease terms as we seek to open
new stores and relocate a portion of our existing store
base to freestanding locations;
o the creditworthiness of the purchasers of former
businesses whose store leases are guaranteed by CVS as
described under Item 2. "Properties" below;
o our ability to continue to purchase inventory on
favorable terms;
o our ability to attract, hire and retain suitable
pharmacists and management personnel;
o our ability to establish effective promotional and
pricing strategies in the different geographic markets
in which we operate; and
o our relationships with suppliers.
ITEM 2. PROPERTIES
We lease most of our stores under long-term leases that vary as to rental
amounts and payments, expiration dates, renewal options and other rental
provisions. We do not think that any individual store lease is significant in
relation to our overall business. For additional information on the amount of
our rental obligations for retail store leases, see Note 6 of "Notes to
Consolidated Financial Statements" on page 30 of our 1998 Annual Report to
Shareholders that is incorporated by reference into Item 8 "Financial Statements
and Supplementary Data."
Our stores are supported by 10 distribution centers located in Rhode Island, New
Jersey, Virginia, Indiana, Alabama, Pennsylvania, Tennessee, North Carolina,
South Carolina and Michigan, which contain an aggregate of approximately
5,400,000 square feet. In addition, we lease additional space near our
distribution centers to handle certain distribution needs.
We own our corporate headquarters, located in three buildings in Woonsocket,
Rhode Island, which contain an aggregate of approximately 345,000 square feet.
Additionally, a fourth headquarters building, expected to contain approximately
207,000 square feet, is currently under construction on a site adjacent to our
existing corporate headquarters. We also lease approximately 352,000 square feet
in seven office buildings in Rhode Island and Massachusetts.
In addition, in connection with certain business dispositions completed between
1991 and 1997, we continue to guarantee lease obligations for approximately
1,600 former stores. We are indemnified for these guarantee obligations by the
respective purchasers. These guarantees generally remain in effect for the
initial lease term and any extension thereof pursuant to a renewal option
provided for in the lease prior to the time of the disposition. Assuming that
each respective purchaser became insolvent, an event which we believe to be
highly unlikely, management estimates that it could settle these obligations for
approximately $1.1 billion as of December 31, 1998.
8
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are involved in the
assertion of claims and in litigation incidental to the normal course of
business. In the opinion of management and our independent counsel, we do not
believe that any existing claims or litigation will have a material adverse
effect on our consolidated financial condition, results of operations or future
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is an unnumbered Item in Part I of this report.
- --------------------------------------------------------------------------------------------------------------------------
Name and Current Position Five-Year Business History Age
- --------------------------------------------------------------------------------------------------------------------------
Charles C. Conaway Executive Vice President and Chief Financial Officer of CVS 38
Executive Vice President and Chief Corporation since July 1996; Executive Vice President and Chief
Financial Officer, CVS Corporation and Financial Officer of CVS Pharmacy, Inc. since February 1995; Senior
CVS Pharmacy, Inc. Vice President - Pharmacy of CVS Pharmacy, Inc., September 1992 -
February 1995
- --------------------------------------------------------------------------------------------------------------------------
Stanley P. Goldstein Chairman of the Board of CVS Corporation since January 1987; Chief 64
Chairman of the Board, CVS Corporation Executive Officer of CVS Corporation, October 1996 - May 1998;
President and Chief Executive Officer of Melville Corporation,
January 1987 - October 1996
- --------------------------------------------------------------------------------------------------------------------------
Rosemary Mede Vice President of CVS Corporation and Senior Vice President - Human 52
Vice President, CVS Corporation Resources of CVS Pharmacy, Inc. since October 1997; Vice
Senior Vice President - Human President/General Manager of Business Services, Becton Dickinson &
Resources, CVS Pharmacy, Inc. Co., December 1995 - September 1997; Various management positions
in human resources, Becton Dickinson & Co., 1998 - November 1995
- --------------------------------------------------------------------------------------------------------------------------
Larry J. Merlo Vice President of CVS Corporation since October 1996; Executive 43
Vice President, CVS Corporation Vice President - Stores of CVS Pharmacy, Inc. since March 1998;
Executive Vice President - Stores, CVS Senior Vice President - Stores of CVS Pharmacy, Inc., January 1994
Pharmacy, Inc. - March 1998
- --------------------------------------------------------------------------------------------------------------------------
Daniel C. Nelson Vice President of CVS Corporation since October 1996; Executive 49
Vice President, CVS Corporation Vice President - Marketing of CVS Pharmacy, Inc., since September
Executive Vice President - Marketing, 1993
CVS Pharmacy, Inc.
- --------------------------------------------------------------------------------------------------------------------------
Thomas M. Ryan President and Chief Executive Officer of CVS Corporation since May 46
President and Chief Executive Officer, 1998; Vice Chairman and Chief Operating Officer of CVS Corporation,
CVS Corporation and CVS Pharmacy, Inc. October 1996 - May 1998; President and Chief Executive Officer of
CVS Pharmacy, Inc. since January 1994; Executive Vice President -
Stores of CVS Pharmacy, Inc., January 1990 - January 1994
- --------------------------------------------------------------------------------------------------------------------------
Douglas A. Sgarro Vice President of CVS Corporation and Senior Vice President - 39
Vice President, CVS Corporation Administration and Chief Legal Officer of CVS Pharmacy, Inc. since
Senior Vice President - Administration September 1997; Partner in the New York City office of the law firm
and Chief Legal Officer, CVS Pharmacy, of Brown & Wood LLP, January 1993 - August 1997
Inc.
- --------------------------------------------------------------------------------------------------------------------------
Larry D. Solberg Vice President of CVS Corporation since October 1996; Senior Vice 51
Vice President and Controller, CVS President - Finance and Controller of CVS Pharmacy, Inc. since
Corporation March 1996; Vice President and Controller of CVS Pharmacy, Inc.,
Senior Vice President - Finance and October 1994 - March 1996; Senior Vice President of PIMMS Corp.,
Controller, CVS Pharmacy, Inc. September 1993 - October 1994
- --------------------------------------------------------------------------------------------------------------------------
In each case, the individual's term of office extends to the date of the board
of directors meeting following the next annual meeting of CVS stockholders. In
addition to the office(s) which they hold in CVS Corporation and CVS Pharmacy,
Inc. as shown above, each of the individuals listed holds various offices in
certain CVS subsidiaries.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included in our 1998 Annual Report to
Shareholders on page 38 under the caption "Quarterly Financial Information," and
is incorporated into this report by reference.
Since October 16, 1996, the common stock of the Company has been listed on the
New York Stock Exchange under the symbol "CVS." As of February 22, 1999, the
record date for the 1999 Annual Meeting of Stockholders, there were 10,500 CVS
stockholders of record. On May 13, 1998, the Company's stockholders approved an
increase in the number of authorized common shares from 300 million to one
billion. Also on that date, the Board of Directors authorized a two-for-one
common stock split, which was effected by the issuance of one additional share
of common stock for each share of common stock outstanding on May 25, 1998. All
share and per share amounts were restated to reflect the effect of the stock
split.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in our 1998 Annual Report to
Shareholders on page 39 under the caption "Five-Year Financial Summary," and is
incorporated into this report by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for as set forth in the following paragraph, the information required by
this item is included in our 1998 Annual Report to Shareholders on pages 14
through 19 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is incorporated into this report by
reference.
Recent Development:
On February 11, 1999, we sold 5.50% unsecured senior notes due February 15, 2004
in the aggregate principal amount of $300 million in a private placement.
Proceeds from the notes were used to repay outstanding commercial paper.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any transactions using derivative financial instruments
or derivative commodity instruments and we do not believe that there is any
material market risk exposure with respect to other financial instruments (such
as fixed and variable rate borrowings) which would require disclosure under this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in our 1998 Annual Report to
Shareholders on pages 20 through 38, and is incorporated into this report by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No events have occurred which would require disclosure under this Item.
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, with the exception of the information
relating to our executive officers, which is presented in Part I under
"Executive Officers of the Registrant", appears in our 1999 Proxy Statement on
pages 4 through 6 and page 27 under the captions Item 1: "Biographies of our
Board Nominees" and Item 5: "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated into this report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in our 1999 Proxy Statement on
pages 7, 8 and 10 through 21 under the captions Item 1: "Director Compensation",
"Compensation Committee Interlocks and Insider Participation", "Compensation
Committee Report on Executive Compensation", "Summary Compensation Table",
"Stock Options", "Stock Performance Graph" and "Certain Executive Arrangements"
and is incorporated into this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in our 1999 Proxy Statement on
pages 8 through 10 under the captions Item 1: "Share Ownership of Directors and
Certain Executive Officers" and "Share Ownership of Principal Stockholders" and
is incorporated into this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in our 1999 Proxy Statement on
page 21 under the caption Item 1: "Transactions with Directors and Officers" and
is incorporated into this report by reference.
11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements, Schedules and Exhibits
1. Financial Statements
The following appear in our 1998 Annual Report to Shareholders at the pages
indicated below and are incorporated into Part II of this report by reference:
Page
----
Management's Responsibility for Financial Reporting........................................................... 20
Independent Auditors' Report.................................................................................. 21
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.................... 22
Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................. 23
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.......... 24
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.................... 25
Notes to Consolidated Financial Statements....................................................................26-38
Five-Year Financial Summary....................................................................................39
2. Schedules
The following schedule appears on page 17 of this report.
Schedule II -- Valuation and Qualifying Accounts
We did not include other financial statement schedules because they are not
applicable or the information is included in the financial statements or related
notes.
3. Exhibits
Exhibits marked with an asterisk (*) are hereby incorporated by reference to
exhibits or appendices previously filed by the Registrant as indicated in
brackets following the description of the exhibit.
Exhibit Description
- ------- -----------
3.1* Amended and Restated Certificate of Incorporation of the Registrant [incorporated by reference
to Exhibit 3.1 of CVS Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1996].
3.1A* Certificate of Amendment to the Amended and Restated Certificate of Incorporation, effective
May 13, 1998 [incorporated by reference to Exhibit 4.1A to
Registrant's Registration Statement No. 333-52055 on Form
S-3/A dated May 18, 1998].
3.2 By-laws of the Registrant, as amended and restated, filed herewith.
4 Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of
holders of long-term debt of the Registrant and its subsidiaries is filed with this report. The
Registrant hereby agrees to furnish a copy of any such
instrument to the Securities and Exchange Commission upon
request.
4.1* Specimen common stock certificate [incorporated by reference to Exhibit 4.1 to the Registration
Statement of the Registrant on Form 8-B dated November 4, 1996].
10.1* Stock Purchase Agreement dated as of October 14, 1995 between The TJX Companies, Inc. and
Melville Corporation, as amended November 17, 1995 [incorporated by reference to Exhibits 2.1
and 2.2 to Melville's Current Report on Form 8-K dated December 4, 1995].
10.2* Stock Purchase Agreement dated as of March 25, 1996 between Melville Corporation and
Consolidated Stores Corporation, as amended May 3, 1996 [incorporated by reference to Exhibits
2.1 and 2.2 to Melville's Current Report on Form 8-K dated May 5, 1996].
12
Exhibit Description
- ------- -----------
10.3* Distribution Agreement dated as of September 24, 1996 among
Melville Corporation, Footstar, Inc. and Footstar Center,
Inc. [incorporated by reference to Exhibit 99.1 to Melville's
Current Report on Form 8-K dated October 28, 1996].
10.4* Tax Disaffiliation Agreement dated as of September 24, 1996
among Melville Corporation, Footstar, Inc. and certain
subsidiaries named therein [incorporated by reference to
Exhibit 99.2 to Melville's Current Report on Form 8-K dated
October 28, 1996].
10.5* Agreement and Plan of Merger dated as of February 6, 1997, as
amended as of March 19, 1997, among the Registrant, Revco
D.S., Inc. and North Acquisition, Corp. [incorporated by
reference to Annex A to the Registrant's Registration
Statement No. 333-24163 on Form S-4 filed March 28, 1997].
10.6* Agreement and Plan of Merger dated as of February 8, 1998, as
amended as of March 2, 1998, among the Registrant, Arbor
Drugs, Inc. and Red Acquisition, Inc. [incorporated by
reference to Exhibit 2 to the Registrant's Registration
Statement No. 333-47193 on Form S-4 filed March 2, 1998].
10.7* Stockholder Agreement dated as of December 2, 1996 between
the Registrant, Nashua Hollis CVS, Inc. and Linens `n Things,
Inc. [incorporated by reference to Exhibit 10(i)(6) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997].
10.8* Tax Disaffiliation Agreement dated as of December 2, 1996
between the Registrant and Linens `n Things, Inc. and certain
of their respective affiliates [incorporated by reference to
Exhibit 10(i)(7) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997].
10.9* Five Year Credit Agreement dated as of May 23, 1997 by and
among the Registrant, the Lenders party thereto, Fleet
National Bank, as Documentation Agent, JP Morgan Securities,
Inc., as Syndication Agent; and The Bank of New York, as
Administrative Agent [incorporated by reference to Exhibit
10(i)(8) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997].
10.10* Note Purchase Agreement dated June 7, 1989 by and among
Melville Corporation and Subsidiaries Employee Stock
Ownership Plan, as Issuer, Melville Corporation, as
Guarantor, and the Purchasers listed therein [incorporated by
reference to Exhibit 10(i)(9) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997].
10.11 (i)* 1973 Stock Option Plan [incorporated by reference to
Exhibit (10)(iii)(A)(i) to Melville Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31,
1987].
(ii)* 1987 Stock Option Plan [incorporated by reference to Exhibit
(10)(iii)(A)(iii) to Melville Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1987].
(iii)* 1989 Directors Stock Option Plan [incorporated by reference
to Exhibit B to Melville Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1988].
(iv)* Melville Corporation Omnibus Stock Incentive Plan
[incorporated by reference to Exhibit B to Melville
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 and Exhibit A to Melville's
definitive Proxy Statement dated March 7, 1995].
13
(v)* Profit Incentive Plan of Melville Corporation [incorporated
by reference to Exhibit A to Melville Corporation's
definitive Proxy Statement dated March 14, 1994].
(vi)* Supplemental Retirement Plan for Select Senior Management of
Melville Corporation I as amended through July 1995
[incorporated by reference to Exhibit 10(iii)(A)(vii) to
Melville's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995].
(vii)* Supplemental Retirement Plan for Select Senior Management of
Melville Corporation II as amended through July 1995
[incorporated by reference to Exhibit 10(iii)(A)(viii) to
Melville's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995].
(viii)* Income Continuation Policy for Select Senior Executives of
Melville Corporation as amended through May 12, 1988
[incorporated by reference to Exhibit 10 (viii) to Melville's
Annual Report on Form 10-K for the fiscal year ended December
31, 1994].
(ix)* Melville Corporation 1996 Directors Stock Plan [incorporated
by reference to Exhibit A to Melville's definitive Proxy
Statement dated March 7, 1996].
(x)* Form of Employment Agreements between the Registrant and each
of Messrs. Ryan, Conaway, Nelson and Merlo [incorporated by
reference to the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1996].
(xi)* Deferred Stock Compensation Plan [incorporated by reference
to Exhibit 10(iii)(A)(xi) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997].
(xii)* 1997 Incentive Compensation Plan [incorporated by reference
to Annex F to Amendment No. 1 to the Registrant's
Registration Statement No. 333-24163 on Form S-4/A filed
April 17, 1997].
(xiii)* Deferred Compensation Plan [incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 27, 1998].
(xiv)* Partnership Equity Program [incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 27, 1998].
(xv) Form of Collateral Assignment and Executive Life Insurance
Agreement between Registrant and each of Messrs. Ryan,
Conaway, Nelson and Merlo, filed herewith.
11 Computation of Earnings per Common Share [incorporated by
reference to the portion of the 1998 Annual Report to
Shareholders on page 37 under the caption "Reconciliation of
Earnings Per Common Share," which is filed herewith in
Exhibit 13].
13 Portions of the 1998 Annual Report to Shareholders of CVS
Corporation which are specifically designated in this Form
10-K as being incorporated by reference.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
14
B. Reports on Form 8-K
On February 9, 1999, the Registrant filed a Current Report on Form 8-K in
connection with CVS' announcement that it privately placed $300 million of 5.50%
unsecured senior notes due 2004 as described in Item 7 above.
On February 11, 1999, the Registrant filed a Current Report on Form 8-K in
connection with CVS' announcement that effective April 14, 1999, Stanley P.
Goldstein, Chairman of the Board of Directors, will retire as chairman although
he will remain a Director. In connection with the retirement, Thomas M. Ryan,
currently President and Chief Executive Officer, will be named Chairman of the
Board of Directors and Chief Executive Officer and Charles C. Conaway, currently
Executive Vice President and Chief Financial Officer, will be named President
and Chief Operating Officer.
WHERE YOU CAN FIND MORE INFORMATION
CVS files annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). You may read
and copy any reports, statements or other information that we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at "http://www.sec.gov."
The SEC allows us to "incorporate by reference", which means that we can
disclose important information to you by referring you to other documents that
we file with the SEC. The information incorporated by reference is legally
considered to be a part of this report.
We incorporate by reference into Part II (Items 5, 6, 7 and 8) and Part IV (Item
14) specified portions of our 1998 Annual Report to Shareholders. We also
incorporate by reference into Part III (Items 10, 11, 12 and 13) specified
portions of our Proxy Statement for the 1999 Annual Meeting of Shareholders,
scheduled to be held on April 14, 1999.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us or the SEC.
Documents incorporated by reference are available from us without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this report. Shareholders may obtain documents incorporated by
reference in this report by requesting them in writing or by telephone from:
CVS Corporation
Investor Relations
670 White Plains Road - Suite 210
Scarsdale, NY 10583
Telephone: (800) 201-0938
15
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
CVS Corporation:
Under date of January 27, 1999, we reported on the consolidated balance
sheets of CVS Corporation and subsidiaries as of December 31, 1998 and 1997, and
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998, as
contained in the 1998 Annual Report to Shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the fiscal year ended 1998. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
- ------------
KPMG LLP
Providence, Rhode Island
January 27, 1999
16
CVS CORPORATION
Schedule II -- Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------------------------------------------------
Balance at Additions Deductions
Beginning of Charged to Charged to Balance at
In millions Year Profit & Loss Reserve(1) End of Year
- -------------------------------------------------------------------------------------------------------------------------
Accounts Receivable Allowance for Doubtful Accounts:
Year Ended December 31, 1998 $ 39.2 $ 6.3 $ 5.7 $ 39.8
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 36.9 7.9 5.6 39.2
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 59.3 11.6 34.0 36.9
- -------------------------------------------------------------------------------------------------------------------------
(1) 1996 includes a deduction of $21.2 million that relates to the actual
write-off of certain receivables of former operating businesses that were
retained by the Company subsequent to the sale of the related operating
businesses.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CVS CORPORATION
Date: March 25, 1999 By: /s/ CHARLES C. CONAWAY
-----------------------
Charles C. Conaway
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
---------
/s/ THOMAS M. RYAN President, Chief Executive Officer March 25, 1999
- --------------------------------- and Director (Principal Executive
Thomas M. Ryan Officer)
/s/ CHARLES C. CONAWAY Executive Vice President and Chief
- ----------------------------- Financial Officer (Principal March 25, 1999
Charles C. Conaway Financial Officer)
/s/ LARRY D. SOLBERG Vice President and Controller March 25, 1999
- --------------------------------- (Principal Accounting Officer)
Larry D. Solberg
/s/ EUGENE APPLEBAUM Director March 25, 1999
- ------------------------------
Eugene Applebaum
/s/ ALLAN J. BLOOSTEIN Director March 25, 1999
- --------------------------------
Allan J. Bloostein
/s/ W. DON CORNWELL Director March 25, 1999
- --------------------------------
W. Don Cornwell
/s/ THOMAS P. GERRITY Director March 25, 1999
- -------------------------------
Thomas P. Gerrity
/s/ STANLEY P. GOLDSTEIN Chairman of the Board and Director March 25, 1999
- -----------------------------
Stanley P. Goldstein
/s/ WILLIAM H. JOYCE Director March 25, 1999
- --------------------------------
William H. Joyce
/s/ TERRY R. LAUTENBACH Director March 25, 1999
- --------------------------
Terry R. Lautenbach
/s/ TERRENCE MURRAY Director March 25, 1999
- -----------------------------
Terrence Murray
/s/ SHELI Z. ROSENBERG Director March 25, 1999
- -------------------------------
Sheli Z. Rosenberg
/s/ IVAN G. SEIDENBERG Director March 25, 1999
- ------------------------------
Ivan G. Seidenberg
/s/ THOMAS O. THORSEN Director March 25, 1999
- -----------------------------
Thomas O. Thorsen
18
EXHIBIT INDEX
3.2 By-Laws of the Registrant, as amended and restated [Filed
electronically with SEC only].
10.11(xv) Form of Collateral Assignment and Executive Life Insurance Agreement
between Registrant and each of Messrs. Ryan, Conaway, Nelson and
Merlo [Filed electronically with SEC only].
13 Portions of the 1998 Annual Report to Shareholders of CVS
Corporation which are specifically designated in this Form 10-K as
being incorporated by reference. [Filed electronically with SEC
only].
21 List of Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule [Filed electronically with SEC only].
19