================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No.1)
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
March 27, 1999 001-01011
CVS CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 05-0494040
- ------------------------ ---------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
One CVS Drive, Woonsocket, Rhode Island 02895
---------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Telephone: (401) 765-1500
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
--- ---
Common Stock, $0.01 par value, issued and outstanding at May 3, 1999:
390,833,550 shares
================================================================================
INDEX
PAGE
PART I
Explanatory Note: Purpose of this amendment on Form 10-Q/A 3
Recent Developments 3
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Three Months Ended March 27, 1999 and March 28, 1998 4
Consolidated Condensed Balance Sheets -
As of March 27, 1999 and December 31, 1998 5
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 27, 1999 and March 28, 1998 6
Notes to Consolidated Condensed Financial Statements 7
Independent Auditors' Review Report 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 22
2
EXPLANATORY NOTE: PURPOSE OF THIS AMENDMENT ON FORM 10-Q/A
The principal purpose of this Amendment is to reflect the restatement
adjustments described under "Recent Developments" below. Our Form 10-Q still
speaks as of March 27, 1999 (except as otherwise expressly noted), and no
attempt has been made in this Form 10-Q/A to modify or update our
disclosures, except as required to reflect the effects of the restatement
adjustments to our financial statements.
RECENT DEVELOPMENTS
On May 11, 1999, CVS Corporation filed a Registration Statement on Form S-4
with the Securities and Exchange Commission related to an exchange offer for
the $300 million of debt securities that CVS sold in a private placement on
February 11, 1999.
In connection with the SEC's review of that registration statement, CVS has
restated its consolidated financial statements for 1997 and 1998. As a result
of the restatement, earnings from continuing operations increased $11.9
million (or $0.03 per diluted common share) in 1997 and decreased $11.9
million (or $0.03 per diluted common share) in 1998.
CVS notes that:
- - The restatement simply shifted nonrecurring costs that were related to
the CVS/Arbor and CVS/Revco mergers between quarters in 1997 and 1998, and
had no effect on the two years when viewed together.
- - The restatement has no effect on 1999 or future years.
- - The restatement has no effect on historical cash flows or future cash flow
requirements.
- - We believe the restatement should not affect the financial models of analysts
and investors.
For additional information about the restatement, please read Notes 15 and 16
to the Company's consolidated financial statements, which are included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended December 31,
1998.
3
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
(As Restated)
MARCH 27, March 28,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1999 1998
=======================================================================================
Net sales $ 4,240.5 $ 3,601.5
Cost of goods sold, buying and warehousing costs 3,071.1 2,594.6
- ---------------------------------------------------------------------------------------
Gross margin 1,169.4 1,006.9
Selling, general and administrative expenses 808.2 704.2
Depreciation and amortization 68.0 63.8
Merger, restructuring and other nonrecurring charges -- 5.1
- ---------------------------------------------------------------------------------------
Total operating expenses 876.2 773.1
- ---------------------------------------------------------------------------------------
Operating profit 293.2 233.8
Interest expense, net 14.3 11.2
- ---------------------------------------------------------------------------------------
Earnings before income taxes 278.9 222.6
Income tax provision 114.3 93.6
- ---------------------------------------------------------------------------------------
Net earnings 164.6 129.0
Preference dividends, net of income tax benefit 3.6 3.4
- ---------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 161.0 $ 125.6
=======================================================================================
BASIC EARNINGS PER COMMON SHARE:
Net earnings $ 0.41 $ 0.33
- ---------------------------------------------------------------------------------------
Weighted average basic common shares outstanding 390.5 382.9
=======================================================================================
DILUTED EARNINGS PER COMMON SHARE:
Net earnings $ 0.40 $ 0.32
- ---------------------------------------------------------------------------------------
Weighted average diluted common shares outstanding 408.2 400.9
=======================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.0575 $ 0.0550
=======================================================================================
See accompanying notes to consolidated condensed financial statements.
4
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
MARCH 27, DECEMBER 31,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1999 1998
====================================================================================================================
ASSETS:
Cash and cash equivalents $ 136.8 $ 180.8
Accounts receivable, net 699.3 650.3
Inventories 3,286.3 3,190.2
Other current assets 310.2 327.9
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,432.6 4,349.2
Property and equipment, net 1,378.8 1,351.2
Goodwill, net 690.9 724.6
Deferred charges and other assets 289.7 261.2
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,792.0 $ 6,686.2
====================================================================================================================
LIABILITIES:
Accounts payable $ 1,203.3 $ 1,286.3
Accrued expenses 1,068.7 1,061.3
Short-term borrowings 522.4 771.1
Current maturities of long-term debt 14.6 14.6
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,809.0 3,133.3
Long-term debt 575.5 275.7
Other long-term liabilities 143.3 166.6
SHAREHOLDERS' EQUITY:
Preferred stock; par value $0.01: authorized 0.1 shares, issued and
outstanding 0.0 shares -- --
Preference stock; par value $1.00: authorized 50 shares, Series One
ESOP Convertible, issued and outstanding 5.2 shares at March 27, 1999
and December 31, 1998 279.2 280.0
Common stock; par value $0.01: authorized 1,000 shares, issued 401.8
shares at March 27, 1999 and 401.4 shares at December 31, 1998 4.0 4.0
Treasury stock at cost: 11.1 shares at March 27, 1999 and
11.2 shares at December 31, 1998 (259.4) (260.2)
Guaranteed ESOP obligation (270.7) (270.7)
Capital surplus 1,347.8 1,336.4
Retained earnings 2,163.3 2,021.1
- --------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,264.2 3,110.6
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,792.0 $ 6,686.2
====================================================================================================================
See accompanying notes to consolidated condensed financial statements.
5
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
(As Restated)
MARCH 27, March 28,
IN MILLIONS 1999 1998
=================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 164.6 $ 129.0
Adjustments required to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 68.0 63.8
Merger, restructuring and other nonrecurring charges -- 5.1
Deferred income taxes and other non-cash items 2.7 52.3
Change in assets and liabilities, excluding acquisitions
and dispositions:
(Increase) in accounts receivable, net (49.1) (11.9)
(Increase) in inventories (96.1) (265.5)
(Increase) in other current assets, deferred charges
and other assets (54.2) (18.7)
(Decrease) in accounts payable (82.9) (4.5)
(Decrease) in accrued expenses (23.8) (148.9)
Increase in federal income taxes payable and other liabilities 85.3 50.3
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 14.5 $ (149.0)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (117.8) (105.6)
Proceeds from sale or disposal of assets 25.5 29.6
Acquisitions, net of cash (1.7) --
- -------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (94.0) (76.0)
=================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 300.0 --
(Reductions in) additions to short-term borrowings (248.7) 196.7
Dividends paid (22.5) (22.6)
Proceeds from exercise of stock options 6.9 13.8
Reductions in long-term debt (0.2) (19.8)
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35.5 168.1
=================================================================================================
Net decrease in cash and cash equivalents (44.0) (56.9)
Cash and cash equivalents at beginning of period 180.8 192.5
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 136.8 $ 135.6
=================================================================================================
See accompanying notes to consolidated condensed financial statements.
6
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
The accompanying consolidated condensed financial statements of CVS Corporation
("CVS" or the "Company") have been prepared without audit, in accordance with
the rules and regulations of the Securities and Exchange Commission. In
accordance with such rules and regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes that the disclosures included herein are adequate
to make the information presented not misleading. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1998.
In the opinion of management, the accompanying consolidated condensed financial
statements include all adjustments (consisting only of normal recurring
adjustments) which are necessary to present a fair statement of the Company's
results of operations for the interim periods presented. Because of the
influence of various factors on the Company's operations, including certain
holidays and other seasonal influences, net earnings for any interim period may
not be comparable to the same interim period in previous years or necessarily
indicative of earnings for the full fiscal year.
On May 11, 1999, CVS filed a registration statement with the Securities and
Exchange Commission related to an exchange offer for the $300 million of debt
securities that CVS sold in a private placement on February 11, 1999.
In connection with the SEC's review of that registration statement, CVS has
restated its consolidated financial statements for 1997 and 1998 to reflect
the effect of the adjustments discussed in Notes 15 and 16 to the Company's
consolidated financial statements which are included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1998.
The accompanying consolidated condensed financial statements as of and for the
three months ended March 28, 1998 reflect the effect of the restatement
adjustments. The restatement adjustments have no effect on 1999 or future
years.
NOTE 2
In accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations", Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" and Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company
recorded the following nonrecurring charges:
CVS/ARBOR CHARGE
During the second quarter of 1998, the Company recorded a $147.3 million charge
to operating expenses for direct and other merger-related costs pertaining to
the CVS/Arbor merger transaction and certain restructuring activities (the
"CVS/Arbor Charge"). The restructuring activities related to management's plan
to close Arbor's Troy, Michigan corporate headquarters, terminate Arbor's
corporate headquarters employees, and close certain store locations. Asset
write-offs included in this charge totaled $41.2 million. The balance of the
charge, $106.1 million, will require cash outlays of which $49.4 million and
$50.5 million had been incurred as of December 31, 1998 and March 27, 1999,
respectively.
7
PART I ITEM 1
- --------------------------------------------------------------------------------
CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a reconciliation of the beginning and ending liability balances
associated with the CVS/Arbor Charge at March 27, 1999:
=====================================================================================================================
Exit Costs
Employee --------------------------------------
Merger Severance Noncancelable
Transaction & Lease Asset Other Exit
IN MILLIONS Costs Benefits(1) Obligations(2)Write-offs Costs Total
- ---------------------------------------------------------------------------------------------------------------------
CVS/Arbor Charge $ 15.0 $ 27.1 $ 40.0 $ 41.2 $ 24.0 $ 147.3
Utilization through 12/31/98 - cash (15.9) (13.8) -- -- (19.7) (49.4)
Utilization through 12/31/98 - noncash -- -- -- (41.2) -- (41.2)
Transfer(3) 0.9 -- -- -- (0.9) --
- ---------------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 $ -- $ 13.3 $ 40.0 $ -- $ 3.4 $ 56.7
1999 utilization - cash -- (0.8) (0.3) -- -- (1.1)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT 3/27/99(4) $ -- $ 12.5 $ 39.7 $ -- $ 3.4 $ 55.6
=====================================================================================================================
(1) Employee severance and benefits extend through 2000.
(2) Noncancelable lease obligations extend through 2020.
(3) The transfers between the components of the plan were recorded in the same
period that the changes in estimates were determined. These amounts are
considered to be immaterial.
(4) The Company believes that the reserve balances at March 27, 1999 are
adequate to cover the remaining liabilities associated with the CVS/Arbor
Charge.
CVS/REVCO CHARGE
During the second quarter of 1997, the Company recorded a $337.1 million charge
to operating expenses for direct and other merger-related costs pertaining to
the CVS/Revco merger transaction and certain restructuring activities (the
"CVS/Revco Charge"). The restructuring activities related to management's plan
to close Revco's Twinsburg, Ohio corporate headquarters, terminate Revco's
corporate headquarters employees, and close certain store locations. Asset
write-offs included in this charge totaled $82.2 million. The balance of the
charge, $254.9 million, will require cash outlays of which $193.4 million and
$198.9 million had been incurred as of December 31, 1998 and March 27, 1999,
respectively.
Following is a reconciliation of the beginning and ending liability balances
associated with the CVS/Revco Charge at March 27, 1999:
================================================================================================================----
Exit Costs
Employee --------------------------------------
Merger Severance Noncancelable
Transaction & Lease Asset Other Exit
IN MILLIONS Costs Benefits(1) Obligations(2)Write-offs Costs Total
- --------------------------------------------------------------------------------------------------------------------
CVS/Revco Charge $ 35.0 $ 89.8 $ 67.0 $ 82.2 $ 63.1 $ 337.1
Utilization through 12/31/98 - cash (32.4) (77.4) (17.9) -- (65.7) (193.4)
Utilization through 12/31/98 - noncash -- -- -- (82.2) -- (82.2)
Transfer(3) (2.6) -- -- -- 2.6 --
- --------------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 $ -- $ 12.4 $ 49.1 $ -- $ -- $ 61.5
1999 utilization - cash -- (0.8) (4.7) -- -- (5.5)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT 3/27/99(4) $ -- $ 11.6 $ 44.4 $ -- $ -- $ 56.0
================================================================================================================----
(1)Employee severance extends through 1999. Employee benefits extend for a
number of years to coincide with the payment of retirement benefits.
(2) Noncancelable lease obligations extend through 2017.
(3) The transfers between the components of the plan were recorded in the same
period that the changes in estimates were determined. These amounts are
considered to be immaterial.
(4) The Company believes that the reserve balances at March 27, 1999 are
adequate to cover the remaining liabilities associated with the CVS/Revco
Charge.
8
PART I ITEM 1
================================================================================
CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BIG B CHARGE
During the first quarter of 1997, the Company recorded a $31.0 million charge to
operating expenses for certain costs associated with the restructuring of Big B,
Inc., which the Company acquired in 1996 (the "Big B Charge"). Asset write-offs
included in this charge totaled $5.1 million. The balance of the charge, $25.9
million, will require cash outlays of which $10.0 million and $10.7 million had
been incurred as of December 31, 1998 and March 27, 1999, respectively. The
remaining cash outlays primarily include noncancelable lease obligations, which
extend through 2012.
The exit plans related to the CVS/Arbor Charge, the CVS/Revco Charge and the Big
B Charge did not provide future benefit to the retained stores or corporate
facilities.
NOTE 3
In November 1997, the Company completed the final phase of its comprehensive
strategic restructuring program, first 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 (the "Footstar Distribution"), (iii) the initial and
secondary public offerings of Linens `n Things and (iv) the closing of the
Company's administrative office facility located in Rye, New York.
Following is a reconciliation of the beginning and ending liability balances
associated with the strategic restructuring program at March 27, 1999:
====================================================================================================================
Noncancelable Employee
Loss on Lease Severance
IN MILLIONS Disposal Obligations(1) & Benefits(2) Other Total
- --------------------------------------------------------------------------------------------------------------------
Strategic restructuring charges $ 721.8 $ 187.4 $ 58.6 $ 174.2 $ 1,142.0
Utilization through 12/31/98 (760.6) (124.6) (47.9) (174.2) (1,107.3)
Transfer(3) 38.8 (32.8) (6.0) -- --
- --------------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 $ -- $ 30.0 $ 4.7 $ -- $ 34.7
1999 utilization -- (1.2) (1.2) -- (2.4)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT 3/27/99(4) $ -- $ 28.8 $ 3.5 $ -- $ 32.3
====================================================================================================================
(1) Noncancelable lease obligations extend through 2016.
(2) Employee severance and benefits extends through 2000.
(3) At the time the decision was made to separate Bob's Stores from CVS, an
estimated loss on disposal was recorded in the consolidated statements of
operations within discontinued operations. That loss included certain
estimates. At the time of the sale, the total loss on disposal remained
unchanged. However, the components of the loss differed. The transfers
between the components of the plan were made to reflect the nature of the
remaining reserve. In conjunction with the sale, the buyer assumed primary
responsibility for the continuing lease obligations and retained certain
employees that could have otherwise been terminated.
(4) The Company believes that the reserve balances at March 27, 1999 are
adequate to cover the remaining liabilities associated with the strategic
restructuring program.
9
PART I ITEM 1
================================================================================
CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4
On February 11, 1999, the Company privately placed $300 million of 5.50%
unsecured senior notes due February 15, 2004. Proceeds from the notes were used
to repay outstanding commercial paper.
NOTE 5
The Company currently operates a Retail segment and a Pharmacy Benefit
Management ("PBM") segment. The Retail segment, which includes the operation of
over 4,000 retail drugstores in 24 states and the District of Columbia, is the
Company's only reportable segment. The PBM segment provides a full range of
prescription benefit management services to managed care and other
organizations. These services include plan design and administration, formulary
management, mail order pharmacy services, claims processing and generic
substitution.
Following is a reconciliation of the Company's business segments to the
consolidated condensed financial statements as of and for the three months ended
March 27, 1999 and March 28, 1998:
====================================================================================================================
Retail PBM Intersegment Other Consolidated
IN MILLIONS Segment Segment Eliminations(1) Adjustments(2) Totals
- --------------------------------------------------------------------------------------------------------------------
MARCH 27, 1999:
Net sales $ 4,152.4 $ 189.5 $ (101.4) $ -- $ 4,240.5
Operating profit 284.8 8.4 -- -- 293.2
- --------------------------------------------------------------------------------------------------------------------
March 28, 1998:
Net sales $ 3,565.8 $ 111.9 $ (76.2) $ -- $ 3,601.5
Operating profit 235.3 3.6 -- (5.1) 233.8
- --------------------------------------------------------------------------------------------------------------------
Total assets:
MARCH 27, 1999 $ 6,703.4 $ 137.5 $ (48.9) $ -- $ 6,792.0
December 31, 1998 6,602.1 119.6 (35.5) -- 6,686.2
March 28, 1998 6,063.2 68.2 (11.5) -- 6,119.9
====================================================================================================================
(1) Intersegment eliminations relate to intersegment sales and accounts
receivables that occur when a PBM segment customer uses a Retail segment
store to purchase covered merchandise. When this occurs, both segments
record the sale on a stand-alone basis.
(2) The Company evaluates segment performance based on operating profit before
the effect of nonrecurring charges and gains and intersegment profits. Other
adjustments relate to nonrecurring costs that were incurred in connection
with eliminating Revco's noncompatible store merchandise fixtures.
NOTE 6
Following are the components of net interest expense:
=========================================================================
THREE MONTHS ENDED
IN MILLIONS MARCH 27, 1999 March 28, 1998
- -------------------------------------------------------------------------
Interest expense $ 16.1 $ 13.0
Interest income (1.8) (1.8)
- -------------------------------------------------------------------------
Interest expense, net $ 14.3 $ 11.2
=========================================================================
10
PART I ITEM 1
================================================================================
CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7
Basic earnings per common share is computed by dividing: (i) net earnings, after
deducting the after-tax dividends on the ESOP Preference Stock, by (ii) the
weighted average number of common shares outstanding during the period (the
"Basic Shares").
For purposes of computing diluted earnings per common share, the Company
normally assumes that the ESOP preference stock is converted into common stock
and all dilutive stock options are exercised. After the assumed ESOP preference
stock conversion, the ESOP Trust would hold common stock rather than ESOP
preference stock and would receive common stock dividends (currently $0.23 per
share) rather than ESOP preference stock dividends (currently $3.90 per share).
Since the ESOP Trust uses the dividends it receives to service its debt, the
Company would have to increase its contribution to the ESOP Trust to compensate
it for the lower dividends. This additional contribution would reduce the
Company's net earnings, which in turn, would reduce the amounts that would have
to be accrued under the Company's incentive bonus and profit sharing plans.
Diluted earnings per common share 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 bonus and
profit sharing plans by (ii) Basic Shares plus the additional shares that would
be issued assuming that all dilutive stock options are exercised and the ESOP
preference stock is converted into common stock.
Following is a reconciliation of basic and diluted earnings per common share for
the three months ended:
==================================================================================================
MARCH 27, March 28,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1999 1998
- --------------------------------------------------------------------------------------------------
NUMERATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Net earnings $ 164.6 $ 129.0
Preference dividends, net of income tax benefit (3.6) (3.4)
- --------------------------------------------------------------------------------------------------
Net earnings available to common shareholders, basic $ 161.0 $ 125.6
==================================================================================================
Net earnings $ 164.6 $ 129.0
Effect of dilutive securities:
Dilutive earnings adjustments 0.3 (0.2)
- --------------------------------------------------------------------------------------------------
Net earnings available to common shareholders, diluted $ 164.9 $ 128.8
==================================================================================================
DENOMINATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Weighted average common shares, basic 390.5 382.9
Effect of dilutive securities:
ESOP preference stock 10.4 10.6
Stock options 7.3 7.4
- --------------------------------------------------------------------------------------------------
Weighted average common shares, diluted 408.2 400.9
==================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 0.41 $ 0.33
- --------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 0.40 $ 0.32
==================================================================================================
NOTE 8
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountant's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement defines which costs incurred to develop or purchase internal-use
software should be capitalized and which costs should be expensed. Adoption of
this standard did not have a material effect on the financial statements.
11
PART I INDEPENDENT AUDITORS' REVIEW REPORT
================================================================================
The Board of Directors and Shareholders of
CVS Corporation:
We have reviewed the consolidated condensed balance sheet of CVS Corporation as
of March 27, 1999, and the related consolidated condensed statements of
operations and cash flows for the three month periods ended March 27, 1999 and
March 28, 1998. These consolidated condensed financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
The consolidated statements of operations and cash flows for the three month
period ended March 28, 1998, have been restated as discussed in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of CVS Corporation as of December
31, 1998 and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 27, 1999, except for Note 15, to which the date is
November 12, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated condensed balance sheet as of December 31, 1998, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ KPMG LLP
- -----------------------
KPMG LLP
Providence, Rhode Island
April 27, 1999, except for Note 1, to which the date is November 12, 1999
12
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion explains the material changes in our results of
operations for the three months ended March 27, 1999 and March 28, 1998 and the
significant developments affecting our financial condition since December 31,
1998. We strongly recommend that you read our audited consolidated financial
statements and footnotes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1998.
RECENT DEVELOPMENT
On May 11, 1999, CVS filed a registration statement with the Securities and
Exchange Commission related to an exchange offer for the $300 million of debt
securities that CVS sold in a private placement on February 11, 1999.
In connection with the SEC's review of that registration statement, CVS has
restated its consolidated financial statements for 1997 and 1998 to reflect
the effect of the adjustments discussed in Notes 15 and 16 to the
consolidated financial statements, which are included in our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1998. As a result of the
restatement, earnings from continuing operations increased $11.9 million (or
$0.03 per diluted common share) in 1997 and decreased $11.9 million (or $0.03
per diluted common share) in 1998.
What should investors and analysts know about the restatement?
- - The restatement simply shifted nonrecurring costs that were related to the
CVS/Arbor and CVS/Revco mergers between quarters in 1997 and 1998. The
restatement had no effect on the two years when viewed together.
- - The restatement has no effect on 1999 or future years.
- - The restatement has no effect on historical cash flows or future cash
flow requirements.
- - The restatement has no effect on earnings from continuing operations before
merger, restructuring and other nonrecurring charges. Accordingly, we
believe the restatement should not affect the financial models of analysts
and investors.
The following discussion and analysis has been revised to reflect the effect
of the restatement adjustments.
RESULTS OF OPERATIONS
NET SALES for the first quarter of 1999 increased $639.0 million (or 17.7%) to
$4.2 billion, compared to $3.6 billion in the first quarter of 1998. Same store
sales, consisting of sales from stores that have been open for more than one
year, rose 13.4%, while pharmacy same store sales increased 20.4%. Pharmacy
sales were 59% of total sales in the first quarter of 1999, compared to 56% in
the first quarter of 1998. Third party prescription sales were 85% of pharmacy
sales during the first quarter of 1999, compared to 83% in the first quarter of
1998.
As you review our sales performance, we believe you should consider the
following important information:
- Our pharmacy sales growth continued to benefit from our ability to
attract and retain managed care customers, our ongoing program of
purchasing prescription files from independent pharmacies and favorable
industry trends. These trends include an aging American population;
many "baby boomers" are now in their fifties and are consuming a
greater number of prescription drugs. The increased use of
pharmaceuticals as the first line of 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 primarily driven by solid performance
in general merchandise, health and beauty, convenience foods and film
and photofinishing.
- The increase in net sales in 1999 was positively affected by our
efforts to improve the performance of the Revco stores. To do this, we
converted the retained Revco stores to the CVS store format and
relocated certain stores. We are pleased to report that we are seeing
improvements, especially in front store sales. However, the rate of
progress has varied and we expect it to continue to vary, on a
market-by-market basis.
- Sales also benefited from our active relocation program which seeks to
move our existing shopping center stores to larger, more convenient,
freestanding locations. Historically, we have achieved significant
improvements in customer count and net sales when we do this. The
resulting increase in net sales has typically been driven by an
increase in front store sales, which normally have a higher gross
margin. We believe that our relocation program offers a significant
opportunity for future growth, as 27% of our existing stores are
freestanding at March 27, 1999. Our long-term goal is to have 70-80% of
our stores located in freestanding sites.
GROSS MARGIN for the first quarter of 1999 increased $162.5 million (or 16.1%)
to $1,169.4 million, compared to $1,006.9 million in the first quarter of 1998.
Gross margin as a percentage of net sales for the first quarter of 1999 was
27.6%, compared to 28.0% of net sales in the first quarter of 1998.
Why has our gross margin rate been declining?
- Pharmacy sales are growing at a faster pace than front store sales. On
average, our gross margin on pharmacy sales is lower than our gross
margin on front store sales.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- Sales to customers covered by third party insurance programs have
continued to increase and, thus, have become a larger part of our total
pharmacy business. Our gross margin on third party sales has continued
to decline largely due to the efforts of managed care organizations and
other pharmacy benefit managers to reduce prescription drug costs. To
address this trend, we have dropped 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.
TOTAL OPERATING EXPENSES for the first quarter of 1999 were $876.2 million
or (20.7%) of net sales, compared to $773.1 million or 21.5% of net sales in
the first quarter of 1998. As you review our performance in this area, please
remember to consider the impact of the $5.1 million of nonrecurring costs we
incurred during the first quarter of 1998 in connection with eliminating
Revco's noncompatible store merchandise fixtures. If you exclude the effect
of these nonrecurring costs, comparable operating expenses were 20.7% of net
sales in the first quarter of 1999, compared to 21.3% of net sales in the
first quarter of 1998.
What have we done to improve our total operating expenses as a percentage of net
sales?
- Our strong sales performance has consistently allowed net sales to
grow at a faster pace than total operating expenses.
- We eliminated most of Arbor's corporate overhead costs in 1998.
- Our information technology initiatives have led to greater
productivity, which has resulted in lower operating costs, particularly
at the store level.
OPERATING PROFIT for the first quarter of 1999 increased $59.4 million (or
25.4%) to $293.2 million, compared to $233.8 million for the first quarter of
1998. If you exclude the effect of the nonrecurring costs we recorded in total
operating expenses during the first quarter of 1998, comparable operating profit
as a percentage of net sales was 6.9% in the first quarter of 1999, compared to
6.6% in the first quarter of 1998.
INTEREST EXPENSE, NET for the first quarter of 1999 was $14.3 million, compared
to $11.2 million in the first quarter of 1998. Our interest expense totaled
$16.1 million in the first quarter of 1999, compared to $13.0 million in the
first quarter of 1998. Interest income was $1.8 million for both quarters. Our
interest expense increased because we maintained higher average borrowing levels
during the first quarter of 1999.
INCOME TAX PROVISION ~ Our effective tax rate was 41.0% for the first quarter of
1999, compared to 42.0% for the first quarter of 1998. The decrease in 1999 was
primarily due to lower effective state income tax rates.
NET EARNINGS for the first quarter of 1999 increased $35.6 million (or 27.6%) to
$164.6 million, or $0.40 per diluted share, compared to $129.0 million, or $0.32
per diluted share, in the first quarter of 1998. If you exclude the effect of
the nonrecurring costs we recorded in total operating expenses during the
first quarter of 1998, our comparable net earnings increased $32.6 million
(or 24.7%) to $164.6 million, or $0.40 per diluted share, in the first quarter
of 1999, compared to $132.0 million, or $0.33 per diluted share, in the first
quarter of 1998.
14
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY ~ The Company has three primary sources of liquidity: cash provided by
operations, commercial paper and uncommitted lines of credit. We generally
finance our inventory and capital expenditure requirements with internally
generated funds and our commercial paper program. We currently expect to
continue to utilize our commercial paper program during 1999 to support our
working capital needs. In addition, we may elect to use long-term borrowings in
the future to support our continued growth.
Our commercial paper program is supported by a $670 million, five-year unsecured
revolving credit facility which expires on May 30, 2002 and a $460 million,
364-day unsecured revolving credit facility which expires on June 26, 1999.
During the second quarter of 1999, we expect to replace the $460 million credit
facility with a similar facility. The credit facilities contain customary
restrictive financial and operating covenants, none of which is expected to
materially affect our financial or operating flexibility. We can also obtain up
to $35 million of short-term financing through various uncommitted lines of
credit. As of March 27, 1999, we had $487.4 million of commercial paper
outstanding at a weighted average interest rate of 5.2% and $35.0 million
outstanding under the uncommitted lines of credit at a weighted average interest
rate of 4.8%.
On February 11, 1999, the Company privately placed $300 million of 5.50%
unsecured senior notes due February 15, 2004. Proceeds from the notes were used
to repay outstanding commercial paper.
CAPITAL RESOURCES ~ Although there can be no assurances and assuming market
interest rates remain favorable, we currently believe that we will continue to
have access to capital at attractive interest rates in 1999. We further believe
that our cash on hand and cash provided by operations, together with our ability
to obtain additional short-term and long-term financing, will be sufficient to
cover our working capital needs, capital expenditures and debt service
requirements for at least the next twelve months.
NET CASH PROVIDED BY OPERATIONS
Net cash provided by operations increased $163.5 million to $14.5 million during
the first three months of 1999. This compares to net cash used in operations of
$149.0 during the first three months of 1998. The improvement in net cash
provided by operations in 1999 was primarily due to the increase in net
earnings, improved working capital management and a reduction in cash payments
associated with the Arbor and Revco mergers. You should be aware that cash flow
from operations will continue to be negatively impacted by future payments
associated with the Arbor and Revco mergers and the Company's strategic
restructuring program. As of March 27, 1999, the future cash payments associated
with the mergers and the strategic restructuring program totaled $143.9 million.
These payments primarily include: (i) $17.6 million for employee severance,
which extends through 2000, (ii) $10.7 million for retirement benefits and
related excess parachute payment excise taxes, which extend for a number of
years to coincide with the payment of retirement benefits, and (iii) $112.1
million for continuing lease obligations, which extend through 2020.
CAPITAL EXPENDITURES
Our capital expenditures totaled $117.8 million in the first quarter of 1999,
compared to $105.6 million in the first quarter of 1998. During the first
quarter of 1999, we opened 66 new or relocated stores and closed 59 stores. As
of March 27, 1999, we operated 4,096 stores in 24 states and the District of
Columbia, compared to 4,064 stores as of March 28, 1998.
15
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NEW ACCOUNTING STANDARDS
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountant's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement defines which costs incurred to develop or purchase internal-use
software should be capitalized and which costs should be expensed. Adoption of
this standard did not have a material effect on our financial statements.
YEAR 2000 COMPLIANCE STATEMENT
The "Year 2000 Issue" relates to the inability of certain computer hardware and
software to properly recognize and process date-sensitive information for the
Year 2000 and beyond. Without corrective measures, our computer applications
could fail and/or produce erroneous results. To address this concern, we have a
work plan in place to identify the potential issues that could affect our
business. The following discussion will provide you with an update on where we
stand on this important matter.
INFORMATION TECHNOLOGY ("IT") SYSTEMS ~ We have completed the assessment phase
for each of our critical information technology systems. Our IT business systems
include point-of-sale, Rx2000 pharmacy, supply chain management, financial
accounting and other corporate office systems. To date, we have modified or
replaced approximately 90% of our critical IT business systems. We currently
expect to modify or replace the remaining critical business systems by the end
of the second quarter of 1999 and complete our systems testing by the end of the
third quarter of 1999.
NON-IT SYSTEMS ~ We are currently in the process of completing the assessment
phase for each of our critical non-IT business systems, including those with
embedded chip technology. Our non-IT business systems include distribution
center logistics, HVAC, energy management, facility alarms and key entry
systems. To date, we have modified or replaced approximately 35% of our critical
non-IT business systems. We currently expect to modify or replace the remaining
critical non-IT business systems and complete our systems testing by the end of
the third quarter of 1999.
BUSINESS PARTNERS ~ As part of our project work plan, we have been communicating
with our key business partners, including our vendors, suppliers, financial
institutions, managed care organizations, pharmacy benefit managers, third party
insurance programs and governmental agencies to determine the status of their
Year 2000 compliance programs. Although there can be no assurance that we will
not be adversely affected by the Year 2000 issues of our business partners, we
believe that ongoing communication will continue to minimize our risk. As part
of our communication program, we asked each of our key business partners to
complete a Year 2000 readiness questionnaire. To date, approximately 85% of our
business partners have responded, most of which have indicated that their
ability to supply us should not be affected by a Year 2000 issue. Should one or
more of our critical business partners become unable to deliver the merchandise
or services we require, we can often obtain similar merchandise or services from
other sources. Because we are relying on information provided to us by outside
parties, we cannot provide assurance that the information we receive is either
complete or accurate. Therefore, we cannot provide assurance that we will not be
adversely affected by the Year 2000 issues of our business partners. However, we
believe that ongoing communication will continue to minimize this risk.
POTENTIAL RISKS ~ We currently anticipate that minimal business disruption will
occur as a result of the Year 2000 issue. However, the potential risks
associated with failing to remediate our Year 2000 issues include, but are not
limited to: temporary disruptions in store operations; temporary disruptions in
the ordering, receiving and shipping of merchandise and in the ordering and
receiving of other goods and services; temporary disruptions in the billing and
collecting of accounts receivable; temporary disruptions in services provided by
banks and other financial institutions; temporary disruptions in communication
services; and temporary disruptions in utility services.
16
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCREMENTAL COST ~ We currently estimate that the incremental cost associated
with completing our Year 2000 work plan will be approximately $10 million, of
which approximately $7 million has been incurred through March 27, 1999. This
estimate could change as additional information becomes available. The cost to
resolve our Year 2000 issues will be funded through our operating cash flows.
CONTINGENCY PLAN ~ We are currently in the process of developing a contingency
plan for each area in our organization that could be affected by the Year 2000
issue. We anticipate that our contingency plan will be completed during the
third quarter of 1999. Although we currently anticipate minimal business
disruption, the failure of either the Company or one or more of our major
business partners to remediate critical Year 2000 issues could have a materially
adverse impact on our business, operations and financial condition. Please read
the "Cautionary Statement Concerning Forward-Looking Statements" section below.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this Form 10-Q/A (as well as in other
public filings, our website, press releases and oral statements made by Company
representatives) that are subject to risks and uncertainties.
Forward-looking statements include the information concerning:
- our future operating performance, including sales and earnings per
common share growth and cost savings and synergies following the Revco
and Arbor mergers;
- our ability to elevate the performance level of Revco stores following
the Revco merger;
- our belief that we have sufficient cash flows to support working
capital needs, capital expenditures and debt service requirements;
- our belief that we can continue to improve operating performance by
relocating existing stores to freestanding locations;
- our belief that we can continue to reduce selling, general and
administrative expenses as a percentage of net sales;
- our belief that we can continue to reduce inventory levels; and
- our belief that we will incur only minimal business disruption as a
result of the Year 2000 Issue.
In addition, statements that include the words "believes," "expects,"
"anticipates," "intends," "estimates" or other similar expressions are
forward-looking statements. For those 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 Form 10-Q/A (including the notes to the
consolidated condensed financial statements included herein), in our Annual
Report on Form 10-K/A for the year ended December 31, 1998, and in our other
public filings, our website, press releases and oral statements made by
Company representatives, could affect the future results of the Company and
could cause actual results to differ materially from those expressed in our
forward-looking statements. We assume no obligation to update any
forward-looking information.
17
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
What factors could affect the outcome of our forward-looking statements?
INDUSTRY AND MARKET FACTORS
- changes in economic conditions generally or in the markets served by
CVS;
- future federal and/or state regulatory and legislative actions
(including accounting standards and taxation requirements) affecting
CVS and/or the chain-drug industry;
- consumer preferences and spending patterns;
- competition from other drugstore chains; from alternative distribution
channels such as supermarkets, membership clubs, mail order companies
and internet companies (e-commerce) and from third party plans; and
- 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
- our ability to combine the businesses of CVS, Revco and Arbor while
maintaining current operating performance levels 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;
- our ability to implement new computer systems and technologies;
- 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;
- the creditworthiness of the purchasers of former businesses whose store
leases are guaranteed by CVS;
- fluctuations in the cost and availability of inventory and our ability
to maintain favorable supplier arrangements and relationships;
- our ability to attract, hire and retain suitable pharmacists and
management personnel;
- our ability and the ability of our key business partners to replace,
modify or upgrade computer systems in ways that adequately address the
Year 2000 issue. Given the numerous and significant uncertainties
involved, there can be no assurances that Year 2000 related estimates
and anticipated results will be achieved as actual results could differ
materially;
- our ability to establish effective advertising, marketing and
promotional programs (including pricing strategies) in the different
geographic markets in which we operate; and
- our relationships with suppliers.
18
PART I ITEM 3
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments, principally interest
rate risk inherent in its debt portfolio, is not material.
19
PART II ITEM 6
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EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to 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
(incorporated by reference to Exhibit 3.2 to CVS Corporation's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
15.1 Letter re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule - March 27, 1999.
REPORTS ON FORM 8-K:
On February 9, 1999, we 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 February 2004.
On February 11, 1999, we filed a Current Report on Form 8-K in connection with
CVS' announcement that effective April 14, 1999, Stanley P. Goldstein, would
retire as Chairman of the Board of Directors although he would remain a
Director. Additionally, in connection with the retirement, Thomas M. Ryan,
previously President and Chief Executive Officer, would be named Chairman of the
Board and Chief Executive Officer and Charles C. Conaway, previously Executive
Vice President and Chief Financial Officer, would be named President and Chief
Operating Officer.
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q/A to be signed
on its behalf by the undersigned thereunto duly authorized.
CVS Corporation
(REGISTRANT)
/s/ David B. Rickard
- ------------------------
David B. Rickard
Executive Vice President and Chief Financial Officer
November 16, 1999
20