================================================================================
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
June 26, 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 August 2, 1999:
391,734,000 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 and Six Months Ended June 26, 1999 and June 27, 1998 4
Consolidated Condensed Balance Sheets -
As of June 26, 1999 and December 31, 1998 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 26, 1999 and June 27, 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 22
PART II
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature Page 24
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 June 26, 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 non-recurring 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
================================================================================
CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ------------------------------
(As Restated) (As Restated)
JUNE 26, June 27, JUNE 26, June 27,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1999 1998 1999 1998
====================================================================================================================
Net sales $ 4,362.4 $ 3,755.9 $ 8,602.9 $ 7,357.4
Cost of goods sold, buying and warehousing costs 3,172.0 2,735.4 6,243.1 5,330.0
- --------------------------------------------------------------------------------------------------------------------
Gross margin 1,190.4 1,020.5 2,359.8 2,027.4
Selling, general and administrative expenses 831.5 726.4 1,639.7 1,430.6
Depreciation and amortization 68.7 61.2 136.7 125.0
Merger, restructuring and other nonrecurring charges -- 161.0 -- 166.1
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 900.2 948.6 1,776.4 1,721.7
- --------------------------------------------------------------------------------------------------------------------
Operating profit 290.2 71.9 583.4 305.7
Interest expense, net 14.5 18.9 28.8 30.1
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 275.7 53.0 554.6 275.6
Income tax provision 113.1 38.4 227.4 132.0
- --------------------------------------------------------------------------------------------------------------------
Net earnings 162.6 14.6 327.2 143.6
Preference dividends, net of income tax benefit 3.6 3.4 7.2 6.8
- --------------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 159.0 $ 11.2 $ 320.0 $ 136.8
====================================================================================================================
BASIC EARNINGS PER COMMON SHARE:
Net earnings $ 0.41 $ 0.03 $ 0.82 $ 0.36
- --------------------------------------------------------------------------------------------------------------------
Weighted average basic common shares outstanding 391.1 385.8 390.8 384.3
====================================================================================================================
DILUTED EARNINGS PER COMMON SHARE:
Net earnings $ 0.40 $ 0.03 $ 0.80 $ 0.35
- --------------------------------------------------------------------------------------------------------------------
Weighted average diluted common shares outstanding 408.7 394.6 408.8 404.1
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE $ 0.0575 $ 0.0550 $ 0.1150 $ 0.1100
====================================================================================================================
See accompanying notes to consolidated condensed financial statements.
4
PART I ITEM 1
================================================================================
CVS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 26, December 31,
IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS 1999 1998
======================================================================================================
ASSETS:
Cash and cash equivalents $ 232.3 $ 180.8
Accounts receivable, net 727.1 650.3
Inventories 3,107.7 3,190.2
Other current assets 312.6 327.9
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,379.7 4,349.2
Property and equipment, net 1,481.1 1,351.2
Goodwill, net 700.9 724.6
Deferred charges and other assets 284.1 261.2
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,845.8 $ 6,686.2
======================================================================================================
LIABILITIES:
Accounts payable $ 1,006.9 $ 1,286.3
Accrued expenses 1,006.0 1,061.3
Short-term borrowings 707.2 771.1
Current maturities of long-term debt 14.6 14.6
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,734.7 3,133.3
Long-term debt 576.4 275.7
Other long-term liabilities 123.0 166.6
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, par value $0.01: authorized 120,619 shares, 0 shares
issued and outstanding -- --
Preference stock, par value $1.00: authorized 50,000,000 shares, Series
One ESOP Convertible, issued and outstanding 5,205,000 shares at
June 26, 1999 and 5,239,000 December 31, 1998 278.2 280.0
Common stock, par value $0.01: authorized 1,000,000,000 shares,
issued 402,743,000 shares at June 26, 1999 and 401,380,000 shares
at December 31, 1998 4.0 4.0
Treasury stock, at cost: 11,091,000 shares at June 26, 1999 and
11,169,000 shares at December 31, 1998 (258.4) (260.2)
Guaranteed ESOP obligation (270.7) (270.7)
Capital surplus 1,363.1 1,336.4
Retained earnings 2,295.5 2,021.1
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,411.7 3,110.6
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,845.8 $ 6,686.2
======================================================================================================
See accompanying notes to consolidated condensed financial statements.
5
PART I ITEM 1
================================================================================
CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------------------
(As Restated)
JUNE 26, June 27,
IN MILLIONS 1999 1998
================================================================================
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 327.2 $ 143.6
Adjustments required to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 136.7 125.0
Merger, restructuring and other non-recurring
charges -- 176.1
Deferred income taxes and other non-cash items 4.2 (6.0)
Change in assets and liabilities, excluding
acquisitions and dispositions:
(Increase) in accounts receivable, net (76.7) (46.9)
Decrease (increase) in inventories 82.8 (62.8)
(Increase) in current assets, deferred charges
and other assets (67.7) (34.3)
(Decrease) in accounts payable (280.5) (367.9)
Increase (decrease) in accrued expens 5.2 (215.0)
(Decrease) increase in federal income taxes
payable and other liabilities (14.6) 128.2
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 116.6 $ (160.0)
================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (276.3) (224.7)
Proceeds from sale or disposal of assets 26.0 37.2
Acquisitions, net of cash (16.7) (16.6)
- --------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (267.0) (204.1)
================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 300.3 --
(Reductions in) additions to short-term borrowings (68.3) 207.4
Dividends paid (44.9) (43.6)
Proceeds from exercise of stock options 15.3 89.8
Reductions in long-term debt (0.5) (20.1)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 201.9 233.5
================================================================================
Net increase (decrease) in cash and cash equivalents 51.5 (130.6)
Cash and cash equivalents at beginning of period 180.8 192.5
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 232.3 $ 61.9
================================================================================
See accompanying notes to consolidated condensed financial statements.
6
PART I ITEM 1
================================================================================
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 1998 and 1997 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 and six months ended June 27, 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
$52.1 million had been incurred as of December 31, 1998 and June 26, 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 June 26, 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 0.9 -- -- -- (0.9) --
- --------------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 $ -- $ 13.3 $ 40.0 $ -- $ 3.4 $ 56.7
1999 utilization - cash -- (1.5) (1.2) -- -- (2.7)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT 6/26/99(3) $ -- $ 11.8 $ 38.8 $ -- $ 3.4 $ 54.0
====================================================================================================================
(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 June 26, 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 and 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 $201.0 million had been incurred as of December 31, 1998 and June
26, 1999, respectively.
Following is a reconciliation of the beginning and ending liability balances
associated with the CVS/Revco Charge at June 26, 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 (2.6) -- -- -- 2.6 --
- --------------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 $ -- $ 12.4 $ 49.1 $ -- $ -- $ 61.5
1999 utilization - cash -- (1.6) (6.0) -- -- (7.6)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT 6/26/99(3) $ -- $ 10.8 $ 43.1 $ -- $ -- $ 53.9
====================================================================================================================
(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 June 26, 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 $14.6 million had
been incurred as of December 31, 1998 and June 26, 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 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 June 26, 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 38.8 (32.8) (6.0) -- --
- -------------------------------------------------------------------------------------------------------
Balance at 12/31/98 $ -- $ 30.0 $ 4.7 $ -- $ 34.7
1999 utilization -- (3.5) (1.0) -- (4.5)
- -------------------------------------------------------------------------------------------------------
BALANCE AT 6/26/99(3) $ -- $ 26.5 $ 3.7 $ -- $ 30.2
=======================================================================================================
(1) Noncancelable lease obligations extend through 2016.
(2) Employee severance 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 June 26, 1999 are
adequate to cover the remaining liabilities associated with the strategic
restructuring program.
NOTE 4
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 consolidated condensed
financial statements.
9
PART I ITEM 1
================================================================================
CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5
Following are the components of net interest expense:
====================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
IN MILLIONS JUNE 26, 1999 June 27, 1998 JUNE 26, 1999 June 27, 1998
- ------------------------------------------------------------------------------------
Interest expense $ 16.4 $ 21.1 $ 32.5 $ 34.2
Interest income (1.9) (2.2) (3.7) (4.1)
- ------------------------------------------------------------------------------------
Interest expense, net $ 14.5 $ 18.9 $ 28.8 $ 30.1
====================================================================================
NOTE 6
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 and six
months ended June 26, 1999 and June 27, 1998:
===============================================================================================
Retail PBM Intersegment Other Consolidated
IN MILLIONS Segment Segment Eliminations(1) Adjustments(2) Totals
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED:
JUNE 26, 1999:
Net sales $ 4,258.8 $ 205.6 $ (102.0) $ -- $ 4,362.4
Operating profit 283.5 6.7 -- -- 290.2
- -----------------------------------------------------------------------------------------------
June 27, 1998:
Net sales $ 3,705.4 $ 120.1 $ (69.6) $ -- $ 3,755.9
Operating profit 241.3 1.6 -- (171.0) 71.9
===============================================================================================
SIX MONTHS ENDED:
JUNE 26, 1999:
Net sales $ 8,411.2 $ 395.1 $ (203.4) $ -- $ 8,602.9
Operating profit 568.3 15.1 -- -- 583.4
- -----------------------------------------------------------------------------------------------
June 27, 1998:
Net sales $ 7,271.2 $ 232.0 $ (145.8) $ -- $ 7,357.4
Operating profit 476.6 5.2 -- (176.1) 305.7
===============================================================================================
Total assets:
JUNE 26, 1999 $ 6,755.6 $ 159.8 $ (69.6) $ -- $ 6,845.8
December 31, 1998 6,602.1 119.6 (35.5) -- 6,686.2
June 27, 1998 5,941.4 81.1 (15.1) -- 6,007.4
===============================================================================================
(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 the CVS/Arbor Charge discussed in Note 2, the
$10 million charge that was recorded in cost of goods sold during the
second quarter of 1998 to reflect markdowns on noncompatible Arbor
merchandise and other nonrecurring costs that were incurred in
connection with eliminating Arbor's information technology systems and
removing Revco's noncompatible store merchandise fixtures.
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 year (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. In the second quarter of 1998,
the assumed conversion of the ESOP preference stock would have increased diluted
earnings per common share and, therefore, was not considered.
Following is a reconciliation of basic and diluted earnings per common share:
===============================================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 26, June 27, JUNE 26, June 27,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
NUMERATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Net earnings $ 162.6 $ 14.6 $ 327.2 $ 143.6
- ---------------------------------------------------------------------------------------------------------------
Preference dividends, net of income tax benefit (3.6) (3.4) (7.2) (6.8)
- ---------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders, basic $ 159.0 $ 11.2 $ 320.0 $ 136.8
===============================================================================================================
Net earnings $ 162.6 $ 14.6 $ 327.2 $ 143.6
Preference dividends, net of income tax benefit -- (3.4) -- --
Effect of dilutive securities:
Dilutive earnings adjustments 0.1 -- 0.3 (0.5)
- ---------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders, diluted $ 162.7 $ 11.2 $ 327.5 $ 143.1
===============================================================================================================
DENOMINATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Weighted average common shares, basic 391.1 385.8 390.8 384.3
Effect of dilutive securities:
Preference stock 10.5 -- 10.6 10.6
Stock options 7.1 8.8 7.4 9.2
- ---------------------------------------------------------------------------------------------------------------
Weighted average common shares, diluted 408.7 394.6 408.8 404.1
===============================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 0.41 $ 0.03 $ 0.82 $ 0.36
- ---------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 0.40 $ 0.03 $ 0.80 $ 0.35
===============================================================================================================
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 June 26, 1999 and the related consolidated condensed statements of operations
for the three and six-month periods ended June 26, 1999 and June 27, 1998, and
cash flows for the six-months then ended. 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 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 and
six-month periods ended June 27, 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
July 27, 1999, except Note 1, for which the date is November 12, 1999
12
PART I ITEM 2
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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 and six months ended June 26, 1999 and June 27, 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 non-recurring costs that were related to
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
SECOND QUARTER (1999 VERSUS 1998)
NET SALES for the second quarter of 1999 increased $606.5 million (or 16.1%) to
$4.4 billion, compared to $3.8 billion in the second quarter of 1998. Same store
sales, consisting of sales from stores that have been open for more than one
year, rose 11.6%, while pharmacy same store sales increased 19.5%. Pharmacy
sales were 58% of total sales in the second quarter of 1999, compared to 57% in
the second quarter of 1998. Third party prescription sales were 86% of pharmacy
sales during the second quarter of 1999, compared to 83% in the second quarter
of 1998.
As you review our sales performance, we believe you should consider the
following important information:
o 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.
o Our front store sales growth was primarily driven by solid performance in
categories such as seasonal merchandise, health and beauty aids, general
merchandise and film and photofinishing.
o The increase in net sales in 1999 was positively affected by our efforts to
improve the performance of the Revco stores. During 1998, 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.
o 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
29% of our existing stores are freestanding at June 26, 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 deliver the
same results as those historically achieved. Please read the "Cautionary
Statement Concerning Forward Looking Statements" section below.
13
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GROSS MARGIN for the second quarter of 1999 increased $169.9 million (or 16.6%)
to $1.2 billion, compared to $1.0 billion in the second quarter of 1998. As you
review our gross margin performance, please remember to consider the impact of
the $10.0 million charge we recorded during the second quarter of 1998 to
reflect markdowns on noncompatible Arbor merchandise. If you exclude the effect
of this charge, our comparable gross margin as a percentage of net sales was
27.3% in the second quarter of 1999, compared to 27.4% in the second quarter of
1998. During the second quarter of 1999, inventory shrinkage was 0.85% of net
sales, compared to 0.90% of net sales in the second quarter of 1998.
Why has our comparable gross margin rate been declining?
o 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.
o 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 second quarter of 1999 were $900.2
million or 20.6% of net sales, compared to $948.6 million or 25.3% of net
sales in the second quarter of 1998. As you review our performance in this
area, please remember to consider the impact of the $147.3 million charge we
recorded during the second quarter of 1998 in conjunction with the CVS/Arbor
merger, the $6.5 million of nonrecurring costs we incurred in connection with
eliminating Arbor's information technology systems and the $7.2 million of
nonrecurring costs we incurred in connection with removing Revco's
noncompatible store merchandise fixtures. If you exclude the effect of these
nonrecurring charges, our comparable total operating expenses were
20.6% of net sales in the second quarter of 1999, compared to 21.0% of net
sales in the second quarter of 1998.
What have we done to improve our comparable total operating expenses as a
percentage of net sales?
o Our strong sales performance has consistently allowed net sales to grow at
a faster pace than total operating expenses.
o We eliminated most of Arbor's corporate overhead costs in 1998.
o 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 second quarter of 1999 increased $218.3 million
(or 303.6%) to $290.2 million, compared to $71.9 million in the second
quarter of 1998. If you exclude the effect of the nonrecurring charges
we recorded during the second quarter of 1998 in cost of goods sold and
total operating expenses, our comparable operating profit increased $47.3
million (or 19.5%) to $290.2 million, compared to $242.9 million in the
second quarter of 1998. Comparable operating profit as a percentage of net
sales was 6.7% in the second quarter of 1999, compared to 6.5% in the second
quarter of 1998.
INTEREST EXPENSE, NET for the second quarter of 1999 was $14.5 million, compared
to $18.9 million in the second quarter of 1998. Our interest expense totaled
$16.4 million in the second quarter of 1999, compared to $21.1 million in the
second quarter of 1998. Interest income was $1.9 million in the second quarter
of 1999, compared to $2.2 million in the second quarter of 1998.
14
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAX PROVISION ~ Our effective tax rate was 41.0% for the second quarter
of 1999, compared to 72.5% for the second quarter of 1998. Our effective income
tax rate was higher in the second quarter of 1998 because certain components of
the charges we recorded in conjunction with the CVS/Arbor merger transaction
were not deductible for income tax purposes. If you exclude the effect of the
non-deductible portion of this charge, our effective tax rate was 41.0% for the
second quarter of 1999, compared to 42.0% for the second quarter of 1998. The
decrease in 1999 was primarily due to lower effective state income tax rates.
NET EARNINGS in the second quarter of 1999, increased $148.0 million to
$162.6 million, or $0.40 per diluted share, compared to $14.6 million, or
$0.03 per diluted share in the second quarter of 1998. If you exclude the
effect of the nonrecurring charges we recorded in cost of goods
sold and total operating expenses, our comparable net earnings increased
$32.7 million (or 25.2%) to $162.6 million, or $0.40 per diluted share, in
the second quarter of 1999, compared to $129.9 million, or $0.32 per diluted
share in the second quarter of 1998.
SIX MONTHS (1999 VERSUS 1998)
NET SALES for the first six months of 1999 increased $1.2 billion (or 16.9%) to
$8.6 billion, compared to $7.4 billion in the first six months of 1998. Same
store sales, rose 12.5%, while pharmacy same store sales increased 19.9%.
Pharmacy sales were 59% of total sales in the first six months of 1999, compared
to 57% in the first six months of 1998. Third party prescription sales were 86%
of pharmacy sales during the first six months of 1999, compared to 83% in the
first six months of 1998. See "Second Quarter (1999 versus 1998)" above for
further information about the factors that affected our net sales.
GROSS MARGIN for the first six months of 1999 increased $332.4 million (or
16.4%) to $2.4 billion, compared to $2.0 billion in the first six months of
1998. As you review our gross margin performance, please remember to consider
the impact of the $10.0 million charge we recorded during the second quarter of
1998 to reflect markdowns on noncompatible Arbor merchandise. If you exclude the
effect of this charge, comparable gross margin as a percentage of net sales for
the first six months of 1999 was 27.4%, compared to 27.7% in the first six
months of 1998. During the first six months of 1999, inventory shrinkage was
0.84% of net sales, compared to 0.90% of net sales in the first six months of
1998. See "Second Quarter (1999 versus 1998)" above for further information
about the factors that affected our comparable gross margin as a percentage of
net sales.
TOTAL OPERATING EXPENSES for the first six months of 1999 were $1.8 billion
or 20.6% of net sales, compared to $1.7 billion or 23.4% of net sales in the
first six months of 1998. As you review our performance in this area, please
remember to consider the impact of the $147.3 million charge we recorded
during the second quarter of 1998 in conjunction with the CVS/Arbor merger,
the $6.5 million of nonrecurring costs we incurred in connection with
eliminating Arbor's information technology systems and the $12.3 million of
nonrecurring costs we incurred in connection with removing Revco's
noncompatible store merchandise fixtures. If you exclude the effect of these
nonrecurring charges, comparable operating expenses were 20.6% of
net sales in the first six months of 1999, compared to 21.1% of net sales in
the first six months of 1998. See "Second Quarter (1999 versus 1998)" above
for further information about the factors that affected our comparable
operating expenses as a percentage of net sales.
OPERATING PROFIT for the first six months of 1999 increased $277.7 million
(or 90.8%) to $583.4 million, compared to $305.7 million for the first six
months of 1998. If you exclude the effect of the nonrecurring charges
we recorded in cost of good sold and total operating expenses,
comparable operating profit as a percentage of net sales was 6.8% in the
first six months of 1999, compared to 6.6% in the first six months of 1998.
15
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST EXPENSE, NET for the first six months of 1999 was $28.8 million,
compared to $30.1 million in the first six months of 1998. Our interest expense
totaled $32.5 million in the first six months of 1999, compared to $34.2 million
in the first six months of 1998. Interest income was $3.7 million in the first
six months of 1999, compared to $4.1 million in the first six months of 1998.
INCOME TAX PROVISION ~ Our effective tax rate was 41.0% for the first six months
of 1999, compared to 47.9% for the first six months of 1998. Our effective
income tax rate was higher in the first half of 1998 because certain components
of the charges we recorded in conjunction with the CVS/Arbor merger transaction
were not deductible for income tax purposes. If you exclude the effect of the
non-deductible portion of this charge, our effective tax rate was 41.0% for the
first six months of 1999, compared to 42.0% for the first six months of 1998.
The decrease in 1999 was primarily due to lower effective state income tax
rates.
NET EARNINGS in the first six months of 1999, increased $183.6 million (or
127.9%) to $327.2 million, or $0.80 per diluted share, compared to $143.6
million, or $0.35 per diluted share in the first six months of 1998. If you
exclude the effect of the nonrecurring charges we recorded in cost
of goods sold and total operating expenses, our comparable net earnings
increased $65.3 million (or 24.9%) to $327.2 million, or $0.80 per diluted
share, in the first six months of 1999, compared to $261.9 million, or $0.65
per diluted share in the first six months of 1998.
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 $530 million,
364-day unsecured revolving credit facility which expires on June 21, 2000. The
$530 million credit facility replaced the $460 million, 364-day unsecured
revolving credit facility that expired during the second quarter of 1999. These
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 June 26, 1999, we
had $684.7 million of commercial paper outstanding at a weighted average
interest rate of 5.1% and $22.5 million outstanding under the uncommitted lines
of credit at a weighted average interest rate of 5.0%.
On February 11, 1999, the Company privately placed $300 million of 5.50%
unsecured senior notes due February 15, 2004. Proceeds 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.
16
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET CASH PROVIDED BY OPERATIONS
Net cash provided by operations increased $276.6 million to $116.6 million
during the first six months of 1999. This compares to net cash used in
operations of $160.0 during the first six months of 1998. The improvement 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 June 26, 1999,
the future cash payments associated with the mergers and the Company's strategic
restructuring program totaled $138.1 million. These payments primarily include:
(i) $16.1 million for employee severance, which extends through 2000, (ii) $10.2
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) $108.4 million for continuing lease obligations,
which extend through 2020.
CAPITAL EXPENDITURES
Capital expenditures totaled $276.3 million in the first six months of 1999,
compared to $224.7 million in the first six months of 1998. As of June 26, 1999,
we operated 4,096 stores in 24 states and the District of Columbia, compared to
4,056 stores as of June 27, 1998.
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 all of our critical IT business systems. We currently expect to
complete our systems testing by the end of the third quarter of 1999.
NON-IT SYSTEMS ~ We have completed 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 inspected
and modified or replaced, as required, approximately 95% of our critical non-IT
business systems. We currently expect to inspect and modify or replace, as
necessary, the remaining critical non-IT business systems and complete our
systems testing by the end of the third quarter of 1999.
17
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. As part of our communication program, we asked
each of our key business partners to complete a Year 2000 readiness
questionnaire. To date, approximately 90% of our business partners have
responded, most of which have indicated that their ability to supply us will not
be affected by the Year 2000 issue. We expect to complete our communications
program during the third quarter of 1999. 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.
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 $8 million has been incurred through June 26, 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.
18
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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:
o our future operating performance, including sales and earnings per common
share growth and cost savings and synergies following the Revco and Arbor
mergers;
o our ability to continue to elevate the performance level of Revco stores
following the Revco merger;
o our belief that we have sufficient cash flows to support working capital
needs, capital expenditures and debt service requirements;
o our belief that we can continue to improve operating performance by
relocating existing stores to freestanding locations;
o our belief that we can continue to reduce selling, general and
administrative expenses as a percentage of net sales;
o our belief that we can continue to reduce inventory levels; and
o 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 "believe," "expect,"
"anticipate," "intend," "estimate," "may," "will" 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.
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 (including
accounting standards and taxation requirements) affecting CVS and/or the
chain-drug industry;
o consumer preferences and spending patterns;
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 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.
19
PART I ITEM 2
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING FACTORS
o 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;
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;
o fluctuations in the cost and availability of inventory and our ability to
maintain favorable supplier arrangements and relationships;
o our ability to attract, hire and retain suitable pharmacists and management
personnel;
o 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; and
o our ability to establish effective advertising, marketing and promotional
programs (including pricing strategies) in the different geographic markets
in which we operate.
20
PART I ITEM 3
================================================================================
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.
21
PART II ITEM 4
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders at our Annual
Meeting of Stockholders held on Wednesday, April 14, 1999 in Woonsocket, Rhode
Island:
========================================================================================================================
BROKER
FOR AGAINST ABSTAINED NON-VOTES
- ------------------------------------------------------------------------------------------------------------------------
1. The election, for one-year terms, of all persons
nominated for directors, as set forth in the
Company's proxy statement dated March 4, 1999, was
approved by the following votes:
Eugene Applebaum 347,000,342 1,434,990 -- --
Allan J. Bloostein 346,952,961 1,482,371 -- --
W. Don Cornwell 347,016,117 1,419,215 -- --
Thomas P. Gerrity 346,959,746 1,475,586 -- --
Stanley P. Goldstein 347,021,683 1,713,649 -- --
William H. Joyce 347,021,695 1,413,637 -- --
Terry R. Lautenbach 346,932,871 1,502,461 -- --
Terrence Murray 347,025,537 1,409,795 -- --
Sheli Z. Rosenberg 346,930,992 1,504,340 -- --
Thomas M. Ryan 347,022,765 1,412,567 -- --
Ivan G. Seidenberg 346,973,943 1,461,389 -- --
Thomas O. Thorsen 346,856,150 1,579,182 -- --
2. The adoption of the 1999 Employee Stock Purchase
Plan was approved by the following vote: 344,541,221 1,799,163 1,056,271 1,038,677
3. The appointment of KPMG LLP as the Company's
independent auditors for the year ending December
31, 1999 was approved by the following vote: 347,041,117 467,644 926,571 --
4. The shareholder proposal to eliminate attendance
fees paid to non-employee directors was rejected
by the following vote: 32,806,549 282,310,887 3,841,349 29,476,647
========================================================================================================================
22
PART II ITEM 6
================================================================================
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 - June 26, 1999.
REPORTS ON FORM 8-K:
- --------------------
There were no reports filed on Form 8-K for the quarter ended June 26, 1999.
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
23