EXHIBIT 99.1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

MERGER

On May 29, 1997, CVS Corporation ("CVS"), formerly known as Melville
Corporation ("Melville") completed a merger with Revco D.S., Inc. ("Revco"),
hereafter collectively referred to as the Company, by exchanging approximately
60.3 million shares of its common stock for all of the outstanding common stock
of Revco (the "Merger"). Each outstanding share of Revco common stock was
exchanged for .8842 shares of CVS common stock. In addition, outstanding Revco
employee stock options were converted at the same exchange ratio into options to
purchase approximately 3.3 million shares of CVS common stock.

The Merger, which constituted a tax-free reorganization, has been accounted
for as a pooling-of-interests under Accounting Principles Board ("APB") Opinion
No. 16, "Accounting for Business Combinations." Accordingly, all prior period
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of Revco as if it had
always been part of CVS.

Pursuant to an agreement with the Federal Trade Commission, the Company is
required to divest 120 Revco stores, primarily in the Richmond, Virginia area.
At June 30, 1997, 114 stores had been divested.

Prior to the Merger, Revco's fiscal year ended on the Saturday closest to
May 31. In recording the business combination, Revco's consolidated financial
statements for the fiscal years ended June 1, 1996 and June 3, 1995 have been
restated to a year ended December 31, to conform with CVS' fiscal year-end. As
permitted by the rules and regulations of the Securities and Exchange
Commission, Revco's fiscal year ended June 3, 1995 has been combined with CVS'
fiscal year ended December 31, 1994. As a result, the consolidated statements of
shareholders' equity include an adjustment in 1994 to reduce the Company's
combined retained earnings for the net earnings of Revco for the five months
ended June 3, 1995. Revco's unaudited results of operations for the five months
ended June 3, 1995 included net sales of $2.0 billion and earnings from
continuing operations of $44 million.

Revco's cost of sales and inventories have been restated from the last-in,
first-out ("LIFO") method to the first-in, first-out ("FIFO") method in order to
conform the accounting method for the combined inventories. The impact of the
restatement was to increase income from continuing operations by $13.5 million
in 1996, $11.9 million in 1995 and $9.9 million in 1994.

There were no material transactions between CVS and Revco prior to the
Merger. Certain reclassifications have been made to the Revco financial
statements to conform to CVS' presentations.

Following is a summary of the results of operations for the separate
companies and the combined amounts presented in the consolidated financial
statements:

1996 1995 1994
--------- -------- --------
(IN MILLIONS)

Net sales:
CVS....................................... $ 5,528.1 $4,865.0 $4,330.1
Revco..................................... 5,416.7 4,898.4 4,431.9
--------- -------- --------
$10,944.8 $9,763.4 $8,762.0
========= ======== ========
Earnings (loss) from continuing operations
before extraordinary item:
CVS....................................... $ 239.6 $ (26.5) $ 90.3
Revco..................................... 101.2 84.3 71.0
--------- -------- --------
$ 340.8 $ 57.8 $ 161.3
========= ======== ========

In accordance with Emerging Issues Task Force ("EITF") 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)," the
Company recorded a charge to operating expenses of $411.7 million in the second
quarter of 1997 for direct and other merger-related costs pertaining to the
merger transaction and certain restructuring programs. Following is a summary of
the significant components of the charge:

(IN MILLIONS)

Merger transaction costs................................. $ 35.0
Restructuring costs:
Employee severance..................................... 89.8
Exit costs............................................. 286.9
------
$ 411.7
======

Merger transaction costs primarily include fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Restructuring activities primarily relate to the consolidation of administrative
functions. These actions will result in the reduction of approximately 1,000
employees, primarily in Revco's Twinsburg, Ohio Headquarters, and will include
the consolidation and closure of certain facilities. Exit costs primarily relate
to activities such as the cancellation of lease agreements, closing of stores
and the write-down of unutilized fixed assets.

Asset write-offs included in the above charge totaled $53.7 million. The
balance of the pre-tax charge, $358.0 million, will require cash outlays,
primarily in 1997 and 1998.

The Company also recorded a charge to cost of goods sold of approximately
$75 million in the second quarter of 1997 to reflect markdowns on non-compatible
merchandise.

STRATEGIC RESTRUCTURING PROGRAM

THE 1995 PLAN

On October 24, 1995 (the "1995 Measurement Date"), the Board of Directors
of CVS approved a comprehensive restructuring plan that was the product of a
strategic review initiated in 1994. The restructuring plan included, among other
things, (i) the continued operation of CVS (which includes CVS, and initially
the Linens 'n Things and Bob's divisions), (ii) the disposal of the Marshalls,
Kay-Bee Toys, Wilsons and This End Up divisions (collectively, the
"Dispositions"), (iii) the spin-off of Footstar, Inc. ("Footstar"), which
includes the Meldisco, Footaction and Thom McAn divisions, and (iv) the
elimination of certain corporate overhead costs (the "Cost Reduction Program").

In connection with the approval of the 1995 Plan, the Company recorded a
pre-tax charge of $872.0 million in the fourth quarter of 1995 (the "1995
Charge") and discontinued the footwear segment in accordance with Accounting
Principles Board("APB") Opinion No. 30, "Reporting the Results of
Operations -- Reporting the effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." As a
result of the 1996 Plan discussed below, the apparel segment and toys and home
furnishings segment were also discontinued. Accordingly, the portion of the 1995
Charge that pertains to these segments, $711.4 million, is reflected as a
component of discontinued operations, and the remainder, $160.6 million, is
included in continuing operations. The amount recorded in continuing operations
primarily includes costs associated with (i) exiting certain geographic markets,
(ii) closing duplicate warehouse facilities and (iii) closing Melville's
Corporate Headquarters. These costs primarily include asset write-offs, closed
store and warehouse lease liabilities and employee severance. Management
determined the amount of (i) asset write-offs by comparing the carrying value of
the assets to be disposed of to the anticipated proceeds, (ii) closed store and
warehouse lease liabilities by calculating the present value of the future
minimum lease payments and (iii) employee severance based on an employee's
compensation and years of service with the Company. The Company applied the
provisions of EITF 94-3 to determine the appropriate accounting treatment for
these charges.
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Asset write-offs included in the 1995 Charge totaled $659.7 million. The
balance of the charge, $212.3 million, will require cash outlays of which $85.7
million had been incurred as of December 31, 1996. The remaining cash outlays
are expected to be incurred primarily in 1997.

In connection with various components of the 1995 Plan, positions for
approximately 1,200 store employees and 400 administrative employees have been
eliminated.

At December 31, 1996, the 1995 Plan had been completed without significant
changes to the Board approved plan. As a result, the Company expects that
earnings from continuing operations before income taxes will improve by
approximately $38 million on an annual basis (projected 1997 versus 1995)
primarily due to the elimination of certain corporate overhead costs.

THE 1996 PLAN

On May 29, 1996 (the "1996 Measurement Date"), the Board of Directors
approved further refinements to the restructuring plan. The refinements included
(i) a formal plan to separate the Linens 'n Things and Bob's divisions from CVS
and (ii) a formal plan to convert 80 to 100 of Thom McAn's stores to the
Footaction store format and to exit the Thom McAn business by mid-1997.

In connection with the approval of the 1996 Plan, the Company recorded, as
a component of discontinued operations, a pre-tax charge of $235.0 million
during the second quarter of 1996 (the "1996 Charge"), substantially all of
which related to asset write-offs that will not require net cash outlays. As a
result of adopting the plan to separate the Linens 'n Things and Bob's divisions
from CVS, the apparel and toys and home furnishings segments were discontinued
in accordance with APB Opinion No. 30.

The Company expects that the 1996 Plan will be completed during 1997
without significant changes to the Board approved plan.

The asset write-offs of $659.7 million and $235.0 million included in the
1995 Charge and 1996 Charge, respectively, primarily relate to the write-down of
the operating divisions to be disposed of to estimated fair value. The
significant judgment included in the above write-offs relates to the estimation
of fair value for each division. These estimates were prepared by independent
third parties.

THE DISPOSALS

On November 17, 1995, the Company completed the sale of the Marshalls
division to The TJX Companies, Inc. for total proceeds of approximately $600
million.

On May 4, 1996, the Company completed the sale of the Kay-Bee Toys division
to Consolidated Stores Corporation for total proceeds of approximately $285.7
million.

On May 25, 1996, the Company completed the sale of the Wilsons division to
an investor group led by Wilsons' management for total proceeds of approximately
$69.7 million.

On May 31, 1996, the Company completed the sale of the This End Up division
to an investor group for approximately $18.2 million.

On October 12, 1996, the Company completed the spin-off of Footstar by
distributing 100% of the shares of Footstar common stock held by CVS to its
shareholders of record as of the close of business on October 2, 1996 (the
"Footstar Distribution"). See Note 23 to the consolidated financial statements
for further information about the Footstar Distribution.

On December 2, 1996, the Company completed the initial public offering of
67.5% of Linens 'n Things, Inc. (the "Linens IPO") for net proceeds of
approximately $189.4 million. In June 1997, the Company sold its remaining
investment in Linens 'n Things for total proceeds of approximately $147.4
million, which resulted in a pre-tax gain of approximately $65 million. This
gain will be reflected in discontinued operations in 1997. In connection with
recording this gain, the Company recorded a pre-tax charge of approximately $35
million in discontinued operations to finalize certain liabilities accrued for
in the 1996 Charge.
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The gain and losses that resulted from the above disposals are reflected in
the "Discontinued Operations" section of the Consolidated Statements of
Operations. The 1996 Charge includes approximately $47 million related to
finalizing certain disposals accrued for in the 1995 Charge. The Company has no
continuing involvement with the divested operations.

OTHER EVENTS

On October 16, 1996, the Company's trading symbol on the New York Stock
Exchange was changed to "CVS" from "MES."

On November 20, 1996 the Company officially changed its name to CVS
Corporation from Melville Corporation.

See Note 3 to the consolidated financial statements for further information
about the Company's strategic restructuring program.

ACQUISITION OF BIG B, INC.

On October 27, 1996, the Company and Big B, Inc. ("Big B"), a retail
drugstore chain formerly headquartered in Bessemer, Alabama operating
approximately 400 drugstores in five southern states, signed a definitive merger
agreement whereby the Company would acquire all of the outstanding shares of Big
B at a price of $17.25 per share in cash. On November 15, 1996, the Company
announced that it completed its cash tender offer for Big B's common stock (the
"Offer"), resulting in the Company owning approximately 85% of the Big B common
stock. On December 23, 1996, the Company completed a step acquisition in which
all remaining Big B shareholders received the same cash price paid in the Offer.
The aggregate transaction value, including the assumption of $49.3 million of
Big B debt, was $423.2 million.

The acquisition of Big B was accounted for as a purchase under APB Opinion
No. 16 using an effective date of November 16, 1996. The purchase price was
allocated to assets acquired and liabilities assumed based on estimated fair
values at the date of acquisition. This resulted in an excess of purchase price
over net assets acquired of $240 million, which is being amortized on a
straight-line basis over 40 years. Big B's results of operations have been
consolidated with the Company's results of operations beginning November 16,
1996.

RESULTS OF OPERATIONS

As a result of the Company's strategic restructuring plan, the results of
operations of the former footwear segment, apparel segment and toys and home
furnishings segment have been classified as discontinued operations in the
accompanying consolidated statements of operations for all periods presented.
The following management discussion, therefore, focuses primarily on continuing
operations.

NET SALES increased 12.1% to $10.9 billion in 1996, compared to an increase
of 11.4% in 1995. The increase in net sales resulted from strong performances in
both the front store (which increased $417.8 million or 8.5% from 1995 to 1996,
compared to an increase of $386.3 million or 8.6% from 1994 to 1995) and
pharmacy (which increased $763.6 million or 15.7% from 1995 to 1996, compared to
an increase of $615.1 million or 14.5% from 1994 to 1995).

The growth in front stores sales was primarily driven by increases in
greeting cards, film and photofinishing, upscale beauty and cosmetics,
convenience foods, private label products and seasonal merchandise. Growth in
pharmacy sales was primarily driven by: (i) increased penetration into managed
care markets, (ii) the purchase of prescription files from independent
pharmacies and (iii) favorable trends, including an aging American population,
greater demand for retail formats that provide easy access and convenience,
discovery of new drug therapies and a need for cost-effective healthcare
solutions.

GROSS MARGIN as a percentage of net sales was 27.89% in 1996, compared to
28.13% in 1995 and 28.53% in 1994. The 24 basis point decrease as a percentage
of net sales in 1996 was primarily due to expected increases in lower gross
margin third party prescription sales and increases in pharmacy sales as a
percentage of total sales (collectively, the "Pharmacy Trends"). This was
partially offset by sales increases in the following higher
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gross margin categories: greeting cards, film and photofinishing, upscale beauty
and cosmetics, convenience foods, private label products and seasonal
merchandise. The 40 basis point decrease in gross margin as a percentage of net
sales in 1995 is primarily due to the Pharmacy Trends.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were 21.10% of net sales in
1996, compared to 22.33% in 1995 and 22.48% in 1994. When comparing 1996 to
1995, it is important to note that $49.4 million of non-recurring operating
charges were recorded in the fourth quarter of 1995. These charges primarily
included initial start-up costs or asset write-offs associated with the Company
(i) changing its policy from capitalizing internally developed software costs to
expensing the costs as incurred, (ii) outsourcing certain technology functions
and (iii) retaining certain employees at Melville's Corporate Headquarters until
their respective job functions were transitioned to CVS. Excluding the effect of
these charges, comparable selling, general and administrative expenses were
21.82% of net sales in 1995. The comparable 72 and 66 basis point improvements
in 1996 and 1995, respectively, were primarily due to (i) the benefit derived
from sales in our existing store base growing at a faster rate than operating
costs, (ii) the Cost Reduction Program, which included closing Melville's
Corporate Headquarters and (iii) the benefits derived from key technology
investments such as our RX 2000 Pharmacy System, Interactive Voice Response
System for prescription refills, Pharmacy Data Warehouse, Point-of-Sale System,
Retail Data Warehouse and Field Management System. These systems have
collectively allowed the Company to reduce the labor costs associated with
filling prescriptions, managing third party healthcare plans, managing
promotional events and scheduling employees.

DEPRECIATION AND AMORTIZATION EXPENSE as a percentage of net sales was
1.73% in 1996, compared to 1.75% in 1995 and 1.76% in 1994. The two basis point
improvement in 1996 was primarily due to the write-off of certain corporate
assets in 1995 as part of the Company's strategic restructuring plan.

OPERATING PROFIT for 1996 increased to $540.8 million from $230.7 million
in 1995. When comparing 1996 to 1995, it is important to note that $165.6
million of restructuring and asset impairment charges and $49.4 million of
non-recurring operating charges included in selling, general and administrative
expenses were recorded in 1995 and $12.8 million of expenses incurred in
connection with the failed merger attempt between Rite-Aid Corporation and Revco
were recorded in 1996 (collectively, the "Special Charges"). Excluding the
effect of the Special Charges, comparable operating profit increased 24.2% in
1996.

COMPARABLE OPERATING PROFIT as a percentage of net sales was 5.06% in 1996,
compared to 4.57% in 1995 and 4.29% in 1994. The 49 basis point improvement in
operating profit as a percentage of net sales in 1996 was primarily due to (i)
leveraging sales growth, (ii) the benefits derived from key technology
investments, (iii) controlling ongoing fixed costs and (iv) the Cost Reduction
Program. The 28 basis point improvement in 1995 was primarily due to controlling
ongoing fixed costs.

GAIN ON SALE OF SECURITIES -- During 1996, the Company completed the sale
of 1.75 million shares of The TJX Companies, Inc. Series D and Series E
preferred stock (the "TJX Securities") for $296.4 million (the "TJX Preferred
Sales"). These transactions resulted in a pre-tax gain of $121.4 million (the
"TJX Gain"). The Company originally received the TJX Securities as a portion of
the proceeds from the sale of the Marshalls division.

DIVIDEND INCOME -- During 1996, the Company recognized dividend income of
approximately $5.6 million on the TJX Securities.

INTEREST EXPENSE totaled $83.2 million in 1996, compared to $114.9 million
in 1995 and $89.3 million in 1994. The decrease in interest expense in 1996 was
primarily due to a reduction in average daily short-term borrowings and
long-term debt (prior to the Company's acquisition of Big B), offset partially
by higher average daily short-term borrowing rates. The decrease in average
daily short-term borrowings in 1996 was primarily due to the favorable impact of
(i) the Dispositions, (ii) the Linens IPO, (iii) the TJX Preferred Sales and
(iv) cash provided by continuing operations. The $25.6 million increase in
interest expense in 1995 was primarily due to an increase in average daily
short-term borrowings that resulted largely from operating losses and
disappointing cash flow results at certain former divisions.

INTEREST INCOME totaled $7.5 million in 1996, compared to $.4 million in
1995 and $3.4 million in 1994. The increase in interest income in 1996 was
primarily due to interest earned on notes receivable that were
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received as a portion of the proceeds from certain of the Dispositions and to an
increase in available cash that resulted from (i) the Dispositions, (ii) the
Linens IPO, (iii) the TJX Preferred Sales and (iv) cash provided by continuing
operations. The decrease in interest income in 1995 was primarily due to a
decrease in available cash that resulted from operating losses and disappointing
cash flow results at certain former divisions.

INCOME TAXES -- The Company's effective income tax rate for continuing
operations was 42.4% in 1996, compared to 50.3% in 1995 and 44.4% in 1994. The
decrease in the tax rate for 1996 was primarily the result of the reduced impact
of non-deductible goodwill amortization over a higher earnings base.

EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM increased to
$340.8 million in 1996 from $57.8 million in 1995. Excluding the TJX Gain and
the failed merger expenses in 1996, earnings from continuing operations were
$275.5 million, or $1.57 per share. Excluding the Special Charges in 1995,
earnings from continuing operations were $184.7 million, or $1.02 per share. In
1994, earnings from continuing operations were $161.3 million, or $.88 per
share.

DISCONTINUED OPERATIONS consists of (i) (loss) earnings from operations,
net of income tax benefit (provision), which represents the earnings or loss for
a segment from the date of the earliest period presented to the respective
segment's measurement date, and (ii) estimated loss on disposal, net of income
tax benefit, which represents the estimated loss on disposal plus the segment's
operating income or loss during the phase-out period. The phase-out period is
defined as the period from the segment's measurement date to the date of
disposal. The estimated loss on disposal was based on the difference between the
carrying value of the segment affected and the estimated proceeds the Company
expects to realize upon disposition. The estimated proceeds were the result of
analyses prepared by independent third parties.

NET EARNINGS including (i) continuing operations which includes the TJX
Gain and expenses related to the failed merger and (ii) discontinued operations
which includes an after-tax restructuring charge of $148.0 million, or $.89 per
share, were $176.6 million, or $.98 per share in 1996. This compares to a net
loss of $572.8 million, or $3.59 per share in 1995 and net earnings of $375.7
million, or $2.20 per share in 1994.

As of June 30, 1997, the Company operated 3,924 stores in 24 states and the
District of Columbia.

LIQUIDITY & CAPITAL RESOURCES

The following discussion regarding liquidity and capital resources should
be read in conjunction with the Company's consolidated balance sheets as of
December 31, 1996 and 1995, and the related consolidated statements of
operations and cash flows for each of the years in the three year period ended
December 31, 1996.

The Company has three primary sources of liquidity: (i) cash provided by
operations, (ii) commercial paper and (iii) bank loan participation notes. At
December 31, 1996, the Company's commercial paper program was supported by a
$320 million unsecured revolving credit facility (the "$320 Million Facility").
In connection with the Merger, the Company replaced its $320 Million Facility
with a $670 million, five year unsecured revolving credit facility and obtained
a $330 million, 364 day unsecured revolving line of credit due May 29, 1998
(collectively the "Credit Facilities"). The Company can also obtain short-term
financing through the issuance of bank loan participation notes.

The Credit Facilities contain customary financial and operating covenants.
Management believes that the restrictions contained in these covenants do not
materially affect the Company's financial flexibility.

The Company issues commercial paper to finance, in part, its seasonal
inventory requirements and capital expenditures. Borrowing levels throughout the
year are typically higher than those reflected in the Company's year-end balance
sheet. Management believes that the Company's cash on hand and cash provided by
operations, together with its ability to secure short-term financing through
commercial paper and bank loan participation notes, will be sufficient to cover
its working capital, capital expenditure and debt service requirements.

In connection with the Merger, on May 30, 1997, the Company repaid $600
million of bank debt outstanding under its Revco Bank Facility which was
subsequently terminated (the "Bank Facility Repay-
7

ment"). On June 30, 1997, the Company redeemed $144.9 million aggregate
principal amount of its 10.125% Senior Notes (the "Debt Redemption") at 105% of
the principal amount thereof plus accrued interest. In addition, on June 25,
1997, the Company commenced an offer (the "Debt Tender Offer") to purchase for
cash $140.0 million aggregate principal amount of its 9.125% Senior Notes. The
Debt Tender Offer expired on July 2, 1997 and $118.8 million aggregate principal
amount of the 9.125% Senior Notes were repurchased at an average price of
104.72% principal amount plus accrued interest. The Company expects to redeem
the remaining 9.125% Senior Notes outstanding on January 15, 1998, the first
redemption date, at 103% of principal plus accrued interest. The Bank Facility
Repayment, Debt Redemption and Debt Tender Offer were financed with cash on hand
and borrowings through the Company's commercial paper program.

CASH AND CASH EQUIVALENTS increased $326.6 million to $471.8 million in
1996 primarily due to the favorable impact of (i) the Dispositions, (ii) the
Linens IPO, (iii) the TJX Preferred Sales, (iv) the Revised Dividend, and (v)
cash provided by continuing operations. The cash flow benefit derived from these
sources was offset partially by the settlement of certain obligations that were
established as part of the Company's strategic restructuring plan and by certain
contributions made in connection with the Footstar Distribution and the Linens
IPO. Cash and cash equivalents did not change materially in 1995 from 1994.

NET CASH PROVIDED BY OPERATING ACTIVITIES increased $3.1 million to $463.1
million in 1996. The change from 1995 to 1996 was not material. Net cash
provided by operating activities decreased $51.5 million to $460.0 million from
1994 to 1995 primarily due to the timing of the sale of the Marshalls division
and operating losses and disappointing cash flow results at certain former
divisions.

NET CASH PROVIDED BY INVESTING ACTIVITIES increased $164.9 million to $54.8
million in 1996 primarily due to (i) the Dispositions, other than the sale of
the Marshalls division, (ii) the Linens IPO, and (iii) the TJX Preferred Sales.
Net cash used in investing activities decreased $677.3 million from 1994 to 1995
primarily due to the proceeds received from the sale of the Marshalls division.

NET CASH USED IN FINANCING ACTIVITIES decreased $134.3 million to $191.3
million in 1996 primarily due to (i) the Revised Dividend, (ii) a reduction of
the amount of cash used to reduce notes payable and (iii) the proceeds received
from the exercise of stock options. The favorable impact of these changes was
offset partially by a decrease in book overdrafts. Net cash used in financing
activities increased $616.9 million to $325.6 million from 1994 to 1995
primarily due to (i) the proceeds received from stock rights offering and (ii)
the proceeds received from issuance of long-term debt in 1994.

During 1997, the Company sold the note receivable that was received as a
portion of the proceeds from the sale of the Kay-Bee Toys division for its
approximate carrying value. As discussed above, in June 1997, the Company sold
its remaining investment in Linens 'n Things. Inc. for total proceeds of
approximately $147.4 million.

In connection with the Company's acquisition of Hook-SupeRx, Inc. ("HSI")
in July 1994 and Big B in December 1996, both of which were accounted for under
the purchase method of accounting, the Company recorded goodwill of $385.0
million and $240.0 million, respectively, representing the excess of the
purchase price of HSI and Big B over the net identifiable assets and liabilities
acquired. The goodwill recorded in these acquisitions is being amortized on a
straight-line basis over 40 years. At December 31, 1996, the unamortized portion
of goodwill attributable to HSI and Big B, as well as to other acquisitions
accounted for under the purchase method of accounting, totaled $721.7 million.

Although goodwill amortization has no impact on the Company's cash flows,
the impact on annual earnings is an after-tax expense of approximately $19
million which is included in depreciation and amortization.

The Company evaluates goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
completing its evaluation, the Company compares estimated future cash flows to
the carrying amount of goodwill. If the carrying amount of goodwill exceeds the
expected future cash flows, the Company considers the goodwill to be impaired
and records an impairment loss. Based on the Company's analysis of future cash
flows, management believes that goodwill is not presently impaired.
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CERTAIN TAX MATTERS

As of May 31, 1996 (the date of the latest filed tax returns for Revco),
the Company had federal net operating loss carryforwards of approximately $234
million expiring in the years 2003 through 2009.

Substantially all of Revco's NOLs are attributable to the time period prior
to Revco's emergence from Chapter 11. As discussed in Note 2 to the consolidated
financial statements, under Fresh Start Reporting, the benefits realized from
these NOLs should reduce Reorganization Goodwill. Accordingly, the tax benefit
of such NOLs utilized during the three years ended December 31, 1996
(approximately $15.3 million, $18.8 million and $17.0 million for 1996, 1995 and
1994, respectively), have not been included in the computation of the Company's
income tax provision, but instead have been reflected as reductions of
Reorganization Goodwill. When realized, the tax benefit of the remaining NOL
carryforward at May 31, 1996, will also reduce Goodwill.

REVISED DIVIDEND

On January 10, 1996, the Board of Directors approved a reduction in the
Company's quarterly dividend from $.38 per share to $.11 per share (the "Revised
Dividend"). Management believes that the Revised Dividend is consistent with
chain-drug industry practice and the Company's anticipated capital requirements.

CAPITAL EXPENDITURES

Capital expenditures were $297.5 million, $528.9 million and $559.8 million
in 1996, 1995 and 1994, respectively. These expenditures were primarily for (i)
new stores, (ii) improvements to existing stores, (iii) store equipment, (iv)
information systems and (v) distribution and office facilities. The lower
capital expenditure level in 1996 was primarily due to the Dispositions.

ACCOUNTING CHANGES

The Company plans to adopt Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" during the fourth quarter of 1997. SFAS
No. 128 was issued in February 1997 and is effective for periods ending after
December 15, 1997. This standard requires the dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures. It also requires a reconciliation of the
computation between basic and diluted earnings per share. Earlier adoption of
this statement is not permitted for comparability reasons. The Company does not
expect basic earnings per share to be materially different from primary earnings
per share.

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." While SFAS No. 123 established financial accounting and reporting
standards for stock based employee compensation plans using a fair value method
of accounting, it allows companies to continue to measure compensation using the
intrinsic value method of accounting prescribed in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company will continue to use its
present APB No. 25 accounting treatment for stock-based compensation. See Note
15 to the consolidated financial statements for further information about SFAS
No. 123.

During the fourth quarter of 1995, the Company changed its policy from
capitalizing internally developed software costs to expensing the costs as
incurred and recorded a charge of $74.5 million ($37.8 million of which
pertained to continuing operations). The effect of the change in accounting
principle has been treated as a change in accounting principle that is
inseparable from the effect of the change in accounting estimate. As
9

a result, the entire amount has been treated as a change in accounting estimate.
The effect of this charge was to reduce net earnings by $45.8 million, or $.28
per common share in 1995.

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS

This Form 8-K contains and incorporates by reference certain
forward-looking statements that are subject to risks and uncertainties.
Forward-looking statements include the information concerning future results of
operations of CVS after completion of the merger with Revco; the information
concerning CVS' ability to continue to achieve significant sales growth; the
information concerning CVS' ability to continue to reduce selling, general and
administrative expenses as a percentage of net sales; as well as those preceded
by, followed by or that otherwise include the words: "believes," "expects,"
"anticipates," "intends," "estimates" or other similar expressions. 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 Annual Report (including in the notes to the
consolidated financial statements included herein) and in our Annual Report on
Form 10-K for the year ended December 31, 1996, could affect the future results
of CVS and could cause those results to differ materially from those expressed
in our forward-looking statements: materially adverse changes in economic
conditions generally or in the markets served by CVS; material changes in
inflation; future regulatory and legislative actions affecting the chain-drug
industry; competition from other drugstore chains, from alternative distribution
channels such as supermarkets, membership clubs, other retailers and mail order
companies; and from other third party plans; and the continued efforts of health
maintenance organizations, managed care organizations, patient benefit
management companies and other third party payors to reduce prescription drug
costs. The forward-looking statements referred to above are also subject to
uncertainties and assumptions relating to the operations and results of
operations of CVS, including: risks relating to CVS' ability to combine the
businesses of CVS and Revco and maintain current operating performance levels
during the integration period and the challenges inherent in diverting CVS'
management focus and resources from other strategic opportunities and from
operational matters for an extended period of time during the integration
process; CVS' ability to continue to secure suitable new store locations on
favorable lease terms, relationship with suppliers, CVS' ability to continue to
purchase inventory on favorable terms; and CVS' ability to attract, hire and
retain suitable pharmacists and management personnel.
10

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
CVS Corporation:

We have audited the accompanying supplemental consolidated balance sheets
of CVS Corporation as of December 31, 1996 and 1995, and the related
supplemental consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
1996. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits. We did not audit the financial statements of Revco D.S., Inc., a
wholly-owned subsidiary, which statements reflect total assets constituting 51.5
percent and 52.1 percent and total revenues constituting 49.5 percent, 50.2
percent and 50.6 percent in 1996, 1995 and 1994, respectively, of the related
consolidated totals (for continuing operations). Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Revco D.S., Inc., is based
solely on the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

The supplemental consolidated financial statements give retroactive effect
to the merger of CVS Corporation and Revco D.S., Inc. on May 29, 1997, which has
been accounted for as a pooling-of-interests as described in Note 1 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of CVS Corporation after financial statements
covering the date of the consummation of the business combination are issued.

In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CVS Corporation as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three year period ended December 31,
1996, in conformity with generally accepted accounting principles applicable
after financial statements are issued for a period which includes the date of
consummation of the business combination.

/s/ KPMG PEAT MARWICK LLP
- --------------------------------------
KPMG Peat Marwick LLP

Providence, Rhode Island
July 16, 1997
11

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF REVCO D.S., INC.:

We have audited the accompanying consolidated balance sheets of Revco D.S., Inc.
and Subsidiaries (collectively the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements and schedule referred to below (not presented separately herein) are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on our
audits.

In our opinion, the consolidated financial statements (not presented separately
herein) referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule accompanying
these consolidated financial statements is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP
- ---------------------------------------------------------
Arthur Andersen LLP

Cleveland, Ohio,
July 15, 1997.
12

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF REVCO D.S., INC.:

We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of Revco D.S., Inc. and Subsidiaries
(collectively the "Company") for the fiscal year ended June 3, 1995. These
consolidated financial statements and schedule referred to below (not presented
separately herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements (not presented separately herein)
referred to above present fairly, in all material respects, the results of
operations and cash flows of the Company for the fiscal year ended June 3, 1995
in conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule accompanying
these consolidated financial statements is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP
- ---------------------------------------------------------
Arthur Andersen LLP

Cleveland, Ohio,
July 27, 1997.
13

CVS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)

Net sales................................................... $10,944.8 $9,763.4 $8,762.0
Cost of goods sold, buying and warehousing costs............ 7,892.7 7,016.5 6,262.0
--------- -------- --------
Gross margin.............................................. 3,052.1 2,746.9 2,500.0
Selling, general and administrative expenses................ 2,309.7 2,180.3 1,969.6
Depreciation and amortization............................... 188.8 170.4 154.1
Restructuring, asset impairment and other non-recurring
charges................................................... 12.8 165.5 --
--------- -------- --------
Total operating expenses.......................... 2,511.3 2,516.2 2,123.7
--------- -------- --------
Operating profit............................................ 540.8 230.7 376.3
Gain on sale of securities.................................. 121.4 -- --
Dividend income............................................. 5.6 -- --
Interest expense, net....................................... (75.7) (114.5) (85.9)
--------- -------- --------
Other income (expense), net....................... 51.3 (114.5) (85.9)
--------- -------- --------
Earnings from continuing operations before income taxes and
extraordinary item........................................ 592.1 116.2 290.4
Income tax provision........................................ (251.3) (58.4) (129.1)
--------- -------- --------
Earnings from continuing operations before extraordinary
item...................................................... 340.8 57.8 161.3
Discontinued operations:
(Loss) earnings from operations, net of income tax benefit
(provision) of $31.0, $171.4 and $(156.0) in 1996, 1995
and 1994, respectively and minority interest of $51.9
in 1994................................................ (54.8) (607.4) 217.2
Estimated loss on disposal, net of income tax benefit of
$56.2 and $9.9 and minority interest of $22.2 and $38.4
in 1996 and 1995, respectively......................... (109.4) (23.2) --
--------- -------- --------
(Loss) earnings from discontinued operations.............. (164.2) (630.6) 217.2
--------- -------- --------
Earnings (loss) before extraordinary item................... 176.6 (572.8) 378.5
Extraordinary item, loss related to early retirement of
debt, net of income tax benefit of $2.4................... -- -- (2.8)
--------- -------- --------
Net earnings (loss)......................................... 176.6 (572.8) 375.7
Preferred dividends, net.................................... (14.5) (17.0) (17.0)
--------- -------- --------
Net earnings (loss) available to common shareholders........ $ 162.1 $ (589.8) $ 358.7
========= ======== ========
PER COMMON SHARE:
Earnings from continuing operations before extraordinary
item................................................... $ 1.96 $ .25 $ .88
(Loss) earnings from discontinued operations.............. (.98) (3.84) 1.34
Extraordinary item, loss related to early retirement of
debt, net.............................................. -- -- (.02)
--------- -------- --------
Net earnings (loss)....................................... $ .98 $ (3.59) $ 2.20
========= ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 166.7 164.4 163.1
========= ======== ========
DIVIDENDS PER COMMON SHARE.................................. $ .44 $ 1.52 $ 1.52
========= ======== ========

See accompanying notes to consolidated financial statements.
14

CVS CORPORATION

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN MILLIONS)

ASSETS:
Cash and cash equivalents............................................. $ 471.8 $ 145.2
Investments........................................................... 181.4 176.9
Accounts receivable, net.............................................. 350.7 446.6
Inventories........................................................... 2,328.2 2,802.9
Other current assets.................................................. 196.8 307.2
------- -------
TOTAL CURRENT ASSETS.......................................... 3,528.9 3,878.8
Property and equipment, net........................................... 1,024.5 1,488.0
Deferred charges and other assets..................................... 223.8 174.1
Goodwill, net......................................................... 721.7 567.0
Reorganization value in excess of amounts allocable
to identifiable assets, net........................................ 194.8 227.7
------- -------
TOTAL ASSETS.................................................. $5,693.7 $6,335.6
======= =======
LIABILITIES:
Accounts payable...................................................... $1,046.3 $1,113.8
Accrued expenses...................................................... 1,007.1 1,367.5
Notes payable......................................................... -- 52.0
Federal income taxes.................................................. 24.5 12.6
Other current liabilities............................................. 44.9 15.2
------- -------
TOTAL CURRENT LIABILITIES..................................... 2,122.8 2,561.1
Long-term debt........................................................ 1,184.3 1,027.6
Deferred income taxes................................................. 49.4 28.3
Other long-term liabilities........................................... 140.8 230.7
Minority interest in subsidiaries..................................... -- 93.8
Redeemable preferred stock............................................ -- 1.3
SHAREHOLDERS' EQUITY:
Preference stock...................................................... 298.6 334.9
Common stock.......................................................... 1.7 170.8
Treasury stock........................................................ (273.1) (304.6)
Guaranteed ESOP obligation............................................ (292.1) (309.7)
Capital surplus....................................................... 875.9 668.2
Retained earnings..................................................... 1,587.8 1,833.0
Other................................................................. (2.4) .2
------- -------
TOTAL SHAREHOLDERS' EQUITY.................................... 2,196.4 2,392.8
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $5,693.7 $6,335.6
======= =======

See accompanying notes to consolidated financial statements.
15

CVS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31,
--------------------------------------------------------
SHARES DOLLARS
--------------------- ------------------------------
1996 1995 1994 1996 1995 1994
----- ----- ----- -------- -------- --------
(IN MILLIONS)

PREFERENCE STOCK:
Beginning of year.................................. 6.3 6.4 6.5 $ 334.9 $ 340.9 $ 347.3
Conversion to common stock......................... (.7) (.1) (.1) (36.3) (6.0) (6.4)
----- ----- ----- ------- ------- -------
End of year........................................ 5.6 6.3 6.4 298.6 334.9 340.9
===== ===== ===== ======= ======= =======
COMMON STOCK:
Beginning of year.................................. 170.8 170.3 156.0 170.8 170.3 156.0
Stock options exercised and awards under stock
plans............................................ 1.7 .4 .3 1.7 .4 .3
Rights Offering.................................... -- -- 13.7 -- -- 13.7
Effect of change in Revco's year end............... -- -- (.4) -- -- (.4)
Effect of change in par value...................... -- -- -- (170.5) -- --
Other issuances of common stock, net............... (.3) .1 .7 (.3) .1 .7
----- ----- ----- ------- ------- -------
End of year........................................ 172.2 170.8 170.3 1.7 170.8 170.3
===== ===== ===== ======= ======= =======
TREASURY STOCK:
Beginning of year.................................. (6.5) (5.8) (5.9) (304.6) (283.8) (289.7)
Repurchase of common stock......................... -- (.8) -- -- (26.3) --
Conversion of preference stock..................... .7 .1 .1 31.6 5.5 5.9
Other.............................................. -- -- -- (.1) -- --
----- ----- ----- ------- ------- -------
End of year........................................ (5.8) (6.5) (5.8) (273.1) (304.6) (283.8)
===== ===== ===== ======= ======= =======
GUARANTEED ESOP OBLIGATION:
Beginning of year.................................. (309.7) (328.1) (328.6)
Reduction of guaranteed ESOP obligation............ 17.6 18.4 .5
------- ------- -------
End of year........................................ (292.1) (309.7) (328.1)
======= ======= =======
CAPITAL SURPLUS:
Beginning of year.................................. 668.2 656.5 444.3
Conversion of preference stock..................... 4.7 .5 .5
Stock options exercised and awards under stock
plans............................................ 41.9 8.3 6.9
Rights Offering.................................... -- -- 200.0
Effect of change in Revco's year end............... -- -- (7.0)
Effect of change in par value...................... 170.5 -- --
Other, net......................................... (9.4) 2.9 11.8
------- ------- -------
End of year........................................ 875.9 668.2 656.5
======= ======= =======
RETAINED EARNINGS:
Beginning of year.................................. 1,833.0 2,582.7 2,428.5
Net earnings (loss)................................ 176.6 (572.8) 375.7
Dividends:
Preference stock, net............................ (14.4) (16.9) (16.9)
Redeemable preferred stock....................... (.1) (.1) (.1)
Common stock..................................... (46.5) (159.9) (160.4)
Footstar Distribution............................ (360.8) -- --
Effect of change in Revco's year end............... -- -- (44.1)
------- ------- -------
End of year........................................ 1,587.8 1,833.0 2,582.7
======= ======= =======
OTHER:
Beginning of year.................................. .2 (1.4) --
Cumulative translation adjustment.................. (.2) 1.6 (1.4)
Unrealized loss on investments, net................ (2.4) -- --
------- ------- -------
End of year........................................ (2.4) .2 (1.4)
======= ======= =======
TOTAL SHAREHOLDERS' EQUITY........................... $2,196.4 $2,392.8 $3,137.1
======= ======= =======

See accompanying notes to consolidated financial statements.
16

CVS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................... $ 176.6 $(572.8) $ 375.7
Adjustments required to reconcile net earnings (loss) to net
cash provided by operating activities:
Restructuring and asset impairment charges............... 235.0 982.4 --
Depreciation and amortization............................ 246.2 327.7 296.7
Gain on sale of securities............................... (121.4) -- --
Minority interest in net earnings........................ 22.2 38.4 51.9
Income from unconsolidated subsidiary.................... (4.5) -- --
Deferred income taxes and other non-cash items........... 115.1 (89.7) 46.0
Net operating loss carryforwards utilized................ 15.3 18.8 17.0
Extraordinary item, loss on early retirement of debt..... -- -- 2.8
Change in assets and liabilities, excluding acquisitions and
dispositions:
Decrease (increase) in accounts receivable, net.......... 4.6 (59.0) (45.3)
(Increase) in inventories................................ (233.6) (349.7) (517.3)
(Increase) in prepaid expenses, deferred charges and
other assets........................................... (93.5) (32.9) (44.9)
Increase in accounts payable............................. 337.9 205.5 129.1
(Decrease) increase in accrued expenses.................. (219.9) 54.6 99.7
(Decrease) increase in Federal income taxes payable and
other liabilities...................................... (16.9) (63.3) 100.1
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 463.1 460.0 511.5
====== ====== ======
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......................... (297.5) (528.9) (559.8)
Proceeds from sale of divisions and other property and
equipment................................................ 240.4 423.6 86.9
Proceeds from initial public offering of Linens 'n Things,
Inc...................................................... 189.4 -- --
Proceeds from sale of securities............................ 296.4 -- --
Proceeds from store divestiture program..................... -- -- 128.8
Acquisitions, net of cash................................... (373.9) (4.8) (346.0)
Acquisition reserve payments................................ -- -- (97.3)
------ ------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........... 54.8 (110.1) (787.4)
====== ====== ======
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid or payable................................... (132.3) (240.0) (225.5)
(Reductions in) additions to notes payable.................. (52.0) (148.0) 110.0
(Decrease) increase in book overdrafts...................... (158.2) 74.8 59.1
Repurchase of common stock.................................. (11.2) (39.1) --
Borrowings (payments) of long-term debt..................... 131.4 21.6 (432.3)
Proceeds from issuance of long-term debt.................... -- -- 582.4
Reductions of long-term debt and obligations under capital
leases................................................... (13.3) (10.5) (4.4)
Proceeds from exercise of stock options and other issuances
of stock................................................. 45.6 14.0 10.5
Proceeds for stock rights offering.......................... -- -- 217.0
Payment of debt and stock issuance costs.................... -- -- (14.4)
Other....................................................... (1.3) 1.6 (11.1)
------ ------ ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........... (191.3) (325.6) 291.3
====== ====== ======
Net increase in cash and cash equivalents..................... 326.6 24.3 15.4
Cash and cash equivalents at beginning of year................ 145.2 120.9 105.4
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 471.8 $ 145.2 $ 120.8
====== ====== ======

See accompanying notes to consolidated financial statements.
17

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. MERGER

There were no material transactions between CVS and Revco prior to the
Merger. Certain reclassifications have been made to the Revco financial
statements to conform to CVS' presentations.

Following is a summary of the results of operations for the separate
companies and the combined amounts presented in the consolidated financial
statements:

1996 1995 1994
--------- -------- --------
(IN MILLIONS)

Net sales:
CVS............................................... $ 5,528.1 $4,865.0 $4,330.1
Revco............................................. 5,416.7 4,898.4 4,431.9
--------- -------- --------
$10,944.8 $9,763.4 $8,762.0
========= ======== ========
Earnings (loss) from continuing operations
before extraordinary item:
CVS............................................... $ 239.6 $ (26.5) $ 90.3
Revco............................................. 101.2 84.3 71.0
--------- -------- --------
$ 340.8 $ 57.8 $ 161.3
========= ======== ========

In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs
18

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Incurred in a Restructuring)," the Company recorded a charge to operating
expenses of $411.7 million in the second quarter of 1997 for direct and other
merger-related costs pertaining to the merger transaction and certain
restructuring programs. Following is a summary of the significant components of
the charge:

(IN MILLIONS)

Merger transaction costs......................................... $ 35.0
Restructuring costs:
Employee severance............................................. 89.8
Exit costs..................................................... 286.9
------
$ 411.7
======

Asset write-offs included in the above charge totaled $53.7 million. The
balance of the pre-tax charge, $358.0 million, will require cash outlays,
primarily in 1997 and 1998.

The Company also recorded a charge to cost of goods sold of approximately
$75 million in the second quarter of 1997 to reflect markdowns on non-compatible
merchandise.

2. SIGNIFICANT ACCOUNTING POLICIES

BUSINESS -- At June 30, 1997, the Company operates as a single business
segment, 3,924 retail drugstores in 24 Northeast, Mid-Atlantic, Southeast and
Midwest states and the District of Columbia. CVS offers customers convenience,
selection, and superior customer service as well as comprehensive prescription
and pharmacy services.

BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated.

As a result of the Company's strategic restructuring program, the results
of operations of the former (i) footwear segment (which includes the Meldisco,
Footaction and Thom McAn divisions), (ii) apparel segment (which includes the
Marshalls, Wilsons, and Bob's divisions) and (iii) toys and home furnishings
segment (which includes the Kay-Bee Toys, This End Up and Linens 'n Things
divisions) have been classified as discontinued operations in the accompanying
consolidated statements of operations for all periods presented.

At December 31, 1996, the Company continued to own 32.5% of its former
wholly-owned subsidiary Linens 'n Things, Inc. This investment was accounted for
using the equity method and was classified as a current asset in the
accompanying December 31, 1996 consolidated balance sheet.

See Note 3 for further information about the Company's strategic
restructuring program and Note 6 for further information about the Company's
investment in Linens 'n Things, Inc.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS -- Cash and cash equivalents, which consist of
cash and temporary investments with maturities of three months or less when
purchased, are stated at cost which approximates market.
19

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORIES -- Inventories are stated at the lower of cost or market using
the FIFO method.

PROPERTY AND EQUIPMENT -- Depreciation of property and equipment is
computed on a straight-line basis, generally over the estimated useful lives of
the assets or, when applicable, the life of the lease, whichever is shorter.
Estimated useful lives generally range from 10 to 40 years for buildings and
improvements, 3 to 10 years for fixtures and equipment, and 3 to 10 years for
leasehold improvements.

IMPAIRMENT OF LONG-LIVED ASSETS -- An impairment loss is recognized
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company primarily groups and evaluates
assets at an individual store level, which is the lowest level at which
independent cash flows can be identified. When evaluating assets for potential
impairment, the Company considers historical performance and, in addition,
estimates future results. If the carrying amount of the related assets exceed
the expected future cash flows, the Company considers the assets to be impaired
and records an impairment loss.

DEFERRED CHARGES AND OTHER ASSETS -- Deferred charges, consisting primarily
of beneficial leasehold costs, are amortized on a straight-line basis, generally
over the remaining life of the leasehold acquired or 15 years, whichever is
shorter. Other assets primarily include notes receivable that were received as a
portion of the proceeds from the sale of certain former divisions and deferred
financing fees.

GOODWILL -- Goodwill is the excess of the cost of net assets acquired in
purchase business combinations over their fair value. It is amortized on a
straight-line basis generally over periods of forty years. Accumulated
amortization was $46.3 million at December 31, 1996 and $41.8 million at
December 31, 1995. The Company evaluates goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. In completing its evaluation, the Company compares estimated future
cash flows to the carrying amount of goodwill. If the carrying amount of
goodwill exceeds the expected future cash flows, the Company considers the
goodwill to be impaired and records an impairment loss.

REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS -- In June 1992, Revco and certain of its subsidiaries which filed
petitions for relief, emerged from Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") pursuant to a confirmed plan of reorganization. At this
time, the Company implemented the recommended accounting principles for entities
emerging from Chapter 11 ("Fresh Start Reporting") set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code." Revco's
reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Goodwill") is being amortized on a straight-line basis over 20
years. This amortization is a non-deductible expense for tax purposes.

Revco has net operating loss carryforwards ("NOLs") available to offset
future federal and state taxable income. These NOLs are attributable to the time
period prior to Revco's emergence from Chapter 11. Under Fresh Start Reporting,
any benefits realized from the utilization of these NOLs should reduce
Reorganization Goodwill. Following is a reconciliation of the original
Reorganization Goodwill recorded by Revco upon emergence from Chapter 11 to the
net amount reflected in the 1996 and 1995 consolidated balance sheets:

1996 1995
------ ------
(IN MILLIONS)

Original balance recorded.......................................... $352.1 $352.1
Accumulated amortization........................................... (80.6) (63.0)
Cumulative NOLs utilized........................................... (76.7) (61.4)
------ ------
$194.8 $227.7
====== ======

FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses. Due to the short-term nature of these instruments, the Company's
carrying value approximates fair value.
20

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MAINTENANCE AND REPAIRS -- Maintenance and repair costs are charged
directly to expense as incurred. Major renewals or replacements that
substantially extend the useful life of an asset are capitalized and
depreciated.

STORE OPENING AND CLOSING COSTS -- New store opening costs are charged
directly to expense as incurred. In the event a store closes before its lease
expires, the remaining lease obligation is provided for in the year of closing.

ADVERTISING COSTS -- External costs incurred to produce media advertising
are charged to expense when the advertising takes place.

INCOME TAXES -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. The tax
benefit for dividends on unallocated shares of Series One ESOP Convertible
Preference Stock (the "ESOP Preference Stock") is recorded as a credit to
retained earnings.

POSTRETIREMENT BENEFITS -- The annual cost of postretirement benefits is
funded in the period incurred and the cost is recognized over an employee's term
of service with the Company. The Company also provides certain health and life
insurance benefits for certain retired employees who met eligibility
requirements and were grandfathered under former benefit plans which have since
been amended or terminated. The costs of these benefits have been fully accrued
by the Company.

EARNINGS PER COMMON SHARE -- Primary earnings per share is computed by
dividing (i) net earnings, after deducting net dividends on redeemable preferred
stock and ESOP Preference Stock ("Primary Earnings") by (ii) the weighted
average number of common shares outstanding during the year assuming the
exercise of stock options ("Primary Shares").

Fully diluted earnings per share assumes that the ESOP Preference Stock is
converted into common stock. Fully diluted earnings per share is computed by
dividing (i) Primary Earnings, after accounting for the difference between the
current dividends on the ESOP Preference Stock and the common stock and after
making adjustments for certain non-discretionary expenses that are based on net
earnings such as incentive bonuses and profit sharing by (ii) Primary Shares
plus the number of additional common shares that would be issued upon the
conversion of the ESOP Preference Stock. Fully diluted earnings per share
presentation is not required on the face of the consolidated statements of
operations due to the results of the materiality tests prescribed in APB Opinion
No. 15, "Earnings Per Share."

ACCOUNTING CHANGES -- The Company plans to adopt Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" during the fourth
quarter of 1997. SFAS No. 128 was issued in February 1997 and is effective for
periods ending after December 15, 1997. This standard requires the dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures. It also requires a
reconciliation of the computation between basic and diluted earnings per share.
Earlier adoption of this statement is not permitted for comparability reasons.
The Company does not expect basic earnings per share to be materially different
from primary earnings per share.

Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." While SFAS No. 123 established financial
accounting and reporting standards for stock-based employee compensation plans
using a fair value method of accounting, it allows companies to continue to
measure compensation using the intrinsic value method of accounting as
prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company will continue to use its present APB Opinion No. 25 accounting
treatment for stock-based compensation. See Note 15 for further information
about SFAS No. 123.
21

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective October 1, 1995, the Company early adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and recorded a pre-tax asset impairment charge of $110.4 million
($5.0 million of which pertained to continuing operations) in connection with
the write-down of certain fixed and intangible assets. The above charge resulted
when the Company began identifying and measuring impairment at a lower level
under SFAS No. 121 than under its previous accounting policy. Under the
Company's previous policy, each of the Company's operating division's long-lived
assets were evaluated as a group for impairment at the division level if the
division was either incurring operating losses or was expecting to incur
operating losses in the future. Since the expected future cash flows measured at
the division level were in excess of the carrying value of the related
divisional assets, no previous impairment losses were recorded.

3. STRATEGIC RESTRUCTURING PROGRAM

THE 1995 PLAN

On October 24, 1995 (the "1995 Measurement Date"), the Board of Directors
approved a comprehensive restructuring plan that was the product of a strategic
review initiated in 1994. The restructuring plan included, among other things,
(i) the continued operation of CVS (which includes CVS, and initially the Linens
'n Things and Bob's divisions), (ii) the disposal of the Marshalls, Kay-Bee
Toys, Wilsons and This End Up divisions, (iii) the spin-off of Footstar, Inc.
("Footstar"), which includes the Meldisco, Footaction and Thom McAn divisions,
and (iv) the elimination of certain corporate overhead costs.

Management determined the amount of (i) asset write-offs by comparing the
carrying value of the assets to be disposed of to the anticipated proceeds, (ii)
closed store and warehouse lease liabilities by calculating the present value of
the future minimum lease payments and (iii) employee severance based on an
employee's compensation level and years of service with the Company. The Company
applied the provisions of EITF 94-3 to determine the appropriate accounting
treatment for these charges.

Asset write-offs included in the 1995 Charge totaled $659.7 million. The
balance of the charge, $212.3 million, will require cash outlays of which $85.7
million, had been incurred as of December 31, 1996. The remaining cash outlays
are expected to be incurred primarily in 1997.

In connection with various components of the 1995 Plan, positions for
approximately 1,200 store employees and 400 administrative employees have been
eliminated.
22

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THE 1996 PLAN

On May 29, 1996, (the "1996 Measurement Date"), the Board of Directors
approved further refinements to the restructuring plan. The refinements included
(i) a formal plan to separate the Linens 'n Things and Bob's divisions from CVS
and (ii) a formal plan to convert 80 to 100 of Thom McAn's stores to the
Footaction store format and to exit the Thom McAn business by mid-1997.

In connection with the approval of the 1996 Plan, the Company recorded, as
a component of discontinued operations, a pre-tax charge of $235.0 million
during the second quarter of 1996 (the "1996 Charge") substantially all of which
related to asset write-offs that will not require net cash outlays. As a result
of adopting the plan to separate the Linens 'n Things and Bob's divisions from
CVS, the apparel and toys and home furnishings segments were discontinued in
accordance with APB Opinion No. 30.

The Company expects that the 1996 Plan will be completed during 1997
without significant changes to the Board approved plan.

THE DISPOSALS

On November 17, 1995, the Company completed the sale of the Marshalls
division to The TJX Companies, Inc. for total proceeds of approximately $600
million.

On May 4, 1996, the Company completed the sale of the Kay-Bee Toys division
to Consolidated Stores Corporation for total proceeds of approximately $285.7
million.

On May 25, 1996, the Company completed the sale of the Wilsons division to
an investor group led by Wilsons' management for total proceeds of approximately
$69.7 million.

On May 31, 1996, the Company completed the sale of the This End Up division
to an investor group for approximately $18.2 million.

On October 12, 1996, the Company completed the spin-off of Footstar by
distributing 100% of the shares of Footstar common stock held by CVS to its
shareholders of record as of the close of business on October 2, 1996 (the
"Footstar Distribution"). See Note 23 for further information about the Footstar
Distribution.

On December 2, 1996, the Company completed the initial public offering of
67.5% of Linens 'n Things, Inc. (the "Linens IPO") for net proceeds of
approximately $189.4 million. See Note 6 for further information about the
Company's investment in Linens 'n Things, Inc.

The gain and losses that resulted from the above disposals are reflected in
the "Discontinued Operations" section of the consolidated statements of
operations. The 1996 Charge includes approximately $47 million related to
finalizing certain disposals accrued for in the 1995 Charge. The Company has no
continuing involvement with the divested operations.
23

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER EVENTS

On October 16, 1996, the Company's trading symbol on the New York Stock
Exchange was changed to "CVS" from "MES."

On November 20, 1996, the Company officially changed its name to CVS
Corporation from Melville Corporation.

Following is a summary of the significant components of the 1995 Charge and
the 1996 Charge:

RESERVE UTILIZED RESERVE
1995 UTILIZED BALANCE AT 1996 IN BALANCE AT
CHARGE IN 1995(1) 12/31/95(4) CHARGE 1996(1)(2)(3) 12/31/96(4)(5)
------ ---------- ----------- ------ ---------- -----------
(IN MILLIONS)

Loss on sale of divisions........... $587.1 $382.2 $ 204.9 $134.7 $177.1 $ 162.5
Lease obligations and asset
write-offs relating to store,
office and warehouse closings..... 146.7 66.4 80.3 5.7 30.5 55.5
Contract termination costs and asset
write-offs relating to outsourcing
certain technology functions...... 64.3 40.3 24.0 -- 19.2 4.8
Severance and employee benefits..... 48.0 .2 47.8 10.6 23.3 35.1
Costs relating to the consolidation
of the footwear divisions and exit
from Thom McAn.................... 20.0 .4 19.6 84.0 103.6 --
Other............................... 5.9 5.9 -- -- -- --
------ ------ ------ ------ ------ ------
$872.0 $495.4 $ 376.6 $235.0 $353.7 $ 257.9
====== ====== ====== ====== ====== ======

- ---------------
(1) $6.1 million and $79.6 million of the amounts utilized in 1995 and 1996,
respectively, required cash outlays.
(2) $80.0 million of the amount utilized in 1996 represents reserve balances
that were retained by Footstar.
(3) $2.4 million of the amount utilized in 1996 represents reserve balances that
were retained by Linen 'n Things, Inc.
(4) $36.8 million and $12.0 million of the balance at December 31, 1995 and
1996, respectively, is included in balance sheet classifications other than
accrued expenses.
(5) The Company believes that the reserve balance at December 31, 1996 is
adequate to cover the remaining costs associated with the strategic
restructuring program.
24

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. DISCONTINUED OPERATIONS

Following is a summary of discontinued operations by reporting segment for
the years ended December 31:

1996 1995 1994
-------- -------- --------
(IN MILLIONS)

Net sales:
Footwear................................... $1,391.1 $1,827.3 $1,839.9
Apparel.................................... 526.4 3,055.7 3,538.9
Toys and Home Furnishings.................. 900.3 1,768.4 1,576.7
-------- -------- --------
$2,817.8 $6,651.4 $6,955.5
======== ======== ========
Operating (loss) profit:(1)
Footwear................................... $ (12.4) $ 47.5 $ 160.5
Apparel.................................... (171.3) (704.0) 161.1
Toys and Home Furnishings.................. (49.7) (115.9) 99.4
-------- -------- --------
$ (233.4) $ (772.4) $ 421.0
======== ======== ========

- ---------------
(1) Includes the effect of the 1995 Charge and the 1996 Charge.

Following is a summary of the assets and liabilities of discontinued
operations by reporting segment as of December 31:

1996 1995
------ --------
(IN MILLIONS)

Assets:
Footwear............................................... $ -- $ 650.5
Apparel................................................ 141.0 313.9
Toys and Home Furnishings.............................. -- 811.3
------ --------
$141.0 $1,775.7
====== ========
Liabilities:
Footwear............................................... $ -- $ 347.6
Apparel................................................ 61.0 125.5
Toys and Home Furnishings.............................. -- 356.8
------ --------
$ 61.0 $ 829.9
====== ========

5. ACQUISITIONS

BIG B, INC.

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HOOK-SUPERX, INC.

On July 15, 1994, the Company completed the acquisition of Hook-SupeRx,
Inc. ("HSI"), a retail drugstore chain formerly headquartered in Cincinnati,
Ohio that operated approximately 1,100 drugstores (801 of which were retained by
the Company) primarily in the Northeast and Midwest regions of the United
States. The aggregate transaction value, including the assumption of $330.5
million of HSI debt, was $632.6 million.

The acquisition of HSI was accounted for as a purchase under APB Opinion
No. 16. The purchase price was allocated to assets acquired and liabilities
assumed based on estimated fair values at the date of acquisition. This resulted
in an excess of purchase price over net assets acquired of $385 million, which
is being amortized on a straight-line basis over 40 years. HSI's results of
operations have been consolidated with the Company's results of operations
beginning July 15, 1994.

In conjunction with this acquisition, the Company charged severance and
payroll costs associated with a program to divest or close approximately 300
stores, two distribution centers, and three administrative offices, as well as
the cost of the discontinued activities of these operations during closing
process, to the reserves recorded at the acquisition date.

6. INVESTMENTS

Investments consisted of the following at December 31:

1996 1995
------ ------
(IN MILLIONS)

Note receivable.................................... $100.0 $ --
Investment in Linens 'n Things, Inc................ 83.2 --
TJX preferred stock................................ -- 175.0
Other.............................................. 2.0 1.9
------ ------
185.2 176.9
Unrealized loss on note receivable................. (3.8) --
------ ------
$181.4 $176.9
====== ======

The note receivable, which matures on May 4, 2000, was received as a
portion of the proceeds from the sale of the Kay-Bee Toys division. At December
31, 1996, the fair market value of this investment was approximately $96.2
million, which represents the present value of the expected future cash flows
discounted at an interest rate that the Company considered to be appropriate for
a loan that would currently be offered to a company with comparable credit risk.
During the second quarter of 1997, the note was sold to an unrelated third party
for its approximate carrying value.

As previously discussed, the Company owned 32.5% of Linens 'n Things, Inc.
at December 31, 1996. The fair market value of this investment was approximately
$123 million based on quoted market prices at December 31, 1996. In June 1997,
the Company sold its remaining investment in Linens 'n Things. Inc. for total
proceeds of approximately $147.4 million, which resulted in a pre-tax gain of
approximately $65 million. This gain will be reflected in discontinued
operations in 1997. In conjunction with recording this gain, the
26

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company recorded a pre-tax charge of approximately $35 million in discontinued
operations to finalize certain liabilities accrued for in the 1996 Charge.

During 1996, the Company completed the sale of the TJX preferred stock for
total proceeds of approximately $296.4 million. The sale of these securities
resulted in a pre-tax gain of $121.4 million.

Except for the investment in Linens 'n Things, Inc., the above assets are
classified as available-for-sale securities and are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, are reported
as a separate component of shareholders' equity until realized.

7. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at December 31:

1996 1995
------ ------
(IN MILLIONS)

Trade.............................................. $304.3 $289.8
Federal income taxes............................... -- 22.4
Other.............................................. 82.4 193.0
------ ------
386.7 505.2
Less allowance for doubtful accounts............... (36.0) (58.6)
------ ------
$350.7 $446.6
====== ======

8. OTHER CURRENT ASSETS

Other current assets consisted of the following at December 31:

1996 1995
------ ------
(IN MILLIONS)

Deferred income taxes.............................. $154.7 $228.2
Other.............................................. 42.1 79.0
------ ------
$196.8 $307.2
====== ======

9. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

1996 1995
-------- --------
(IN MILLIONS)

Land............................................ $ 72.2 $ 73.6
Buildings and improvements...................... 226.9 302.8
Fixtures and equipment.......................... 787.5 1,167.8
Leasehold improvements.......................... 456.7 667.5
Capital leases.................................. 3.3 13.5
-------- --------
1,546.6 2,225.2
Accumulated depreciation and amortization....... (522.1) (737.2)
-------- --------
$1,024.5 $1,488.0
======== ========

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. ACCRUED EXPENSES

Accrued expenses consisted of the following at December 31:

1996 1995
-------- --------
(IN MILLIONS)

Restructuring reserves.......................... $ 245.9 $ 339.8
Taxes other than Federal income taxes........... 109.9 163.8
Salaries and wages.............................. 131.8 170.8
Rent............................................ 124.9 156.7
Other........................................... 394.6 536.4
-------- --------
$1,007.1 $1,367.5
======== ========

11. SHORT-TERM BORROWING ARRANGEMENTS

Following is a summary of short-term borrowings outstanding at December 31:

1996 1995
------ --------
(IN MILLIONS)

Commercial paper................................. $ -- $ 52.0
Weighted average interest rate................... -- 5.9%
------ --------
Lines of credit available........................ $320.0 $1,148.0
Letters of credit outstanding.................... $ 34.0 $ 354.2
====== ========

The Company primarily uses commercial paper to finance its seasonal
inventory requirements and capital expenditures. At December 31, 1996, the
Company's commercial paper program was supported by a $320 million, five year
unsecured revolving credit facility (the "$320 Million Facility").

In connection with the Merger, the Company replaced the $320 Million
Facility with a $670 million, five year unsecured revolving credit facility and
obtained a $330 million, 364 day unsecured revolving line of credit due May 29,
1998. The Company can also obtain short-term financing through the issuance of
bank loan participation notes.

There were no short-term borrowings outstanding at December 31, 1996. The
Company was not obligated under any formal or informal compensating balance
agreements with regards to the short-term borrowings.
28

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. LONG-TERM DEBT

Long-term debt consisted of the following at December 31:

1996 1995
-------- --------
(IN MILLIONS)

CVS debt:
Guaranteed ESOP note, 8.52%, payable in various installments through
2008(1)............................................................ $ 309.4 $ 323.0
Other................................................................. 12.2 19.0
Revco debt:
Bank facility maturing on July 27, 2000, with an average interest rate
of 6.03% at December 31, 1996...................................... 585.4 415.0
9.125% Senior Notes due January 2000.................................. 140.0 140.0
10.125% Senior Notes due June 2002.................................... 144.9 144.9
Other................................................................. 10.3 --
-------- --------
1,202.2 1,041.9
Less current installments............................................... (17.9) (14.3)
-------- --------
$1,184.3 $1,027.6
======== ========

- ---------------
(1) See Note 20 for further information about the Company's ESOP Plan.

BANK FACILITY

In July 1995, the Company completed a modification to various credit
agreements that allowed the Company to consolidate and replace various term loan
and revolving credit facilities with a single amortizing credit facility
maturing on July 27, 2000 (the "Bank Facility"). The Bank Facility was an
unsecured obligation of the Company that provided for a total credit commitment
of $650 million, reducing to $600 million in July 1998, and $525 million in July
1999.

The Bank Facility included certain financial requirements, as well as other
customary covenants, representations and warranties, funding conditions and
events of default. At December 31, 1996, the Company was in compliance with all
such covenants.

The Company has also entered into interest rate cap agreements to hedge its
interest rate exposure on a portion of the Bank Facility. The interest rate caps
establish a maximum interest rate payable when the variable rate exceeds certain
rates. At December 31, 1996, the total notional principal amount of interest
rate cap agreements was $36.6 million, having capped LIBOR rates of 6.25%,
terminating July 1997 through July 2000.

9.125% SENIOR NOTES

The 9.125% Senior Notes are unsecured obligations of the Company due in
January 2000. The notes carry a fixed interest rate and are traded
over-the-counter. At December 31, 1996, the bid price for the notes was $104.88.
Accordingly, the fair value of the notes was $146.8 million at December 31, 1996
versus their carrying value of $140.0 million.

10.125% SENIOR NOTES

The 10.125% Senior Notes were unsecured obligations of the Company due in
June 2002. The notes carried a fixed interest rate and were traded
over-the-counter. At December 31, 1996, the bid price for the notes was $106.43.
Accordingly, the fair value of the notes was $154.3 million at December 31, 1996
versus their carrying value of $144.9 million.
29

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AGGREGATE MATURITIES

At December 31, 1996, the aggregate long-term debt maturing during each of
the next five years was as follows: $17.9 million in 1997, $21.5 million in
1998, $76.5 million in 1999, $681.5 million in 2000, $20.8 million in 2001 and
$384.0 million in 2002 and thereafter.

RETIREMENT OF REVCO DEBT FOLLOWING THE MERGER

On May 30, 1997, the Company repaid $600 million of bank debt outstanding
under its Bank Facility which was subsequently terminated (the "Bank Facility
Repayment"). On June 30, 1997, the Company redeemed $144.9 million aggregate
principal amount of its 10.125% Senior Notes (the "Debt Redemption") at 105% of
the principal amount thereof plus accrued interest. In addition, on June 25,
1997, the Company commenced an offer (the "Debt Tender Offer") to purchase for
cash $140.0 million aggregate principal amount of its 9.125% Senior Notes. The
Debt Tender Offer expired on July 2, 1997 and $118.8 million aggregate principal
amount of the 9.125% Senior Notes were repurchased at an average price of
104.72% principal amount plus accrued interest. The Company expects to redeem
the remaining 9.125% Senior Notes outstanding on January 15, 1998, the first
redemption date, at 103% of principal plus accrued interest. The Bank Facility
Repayment, Debt Redemption and Debt Tender Offer were financed with cash on hand
and borrowings through the Company's commercial paper program.

Following is a summary of net interest expense for the years ended
December 31:

1996 1995 1994
----- ------ -----
(IN MILLIONS)

Interest expense(1)................................ $83.2 $114.9 $89.3
Less interest income and capitalized interest...... (7.5) (.4) (3.4)
----- ------ ------
Net interest expense............................... $75.7 $114.5 $85.9
===== ====== ======

- ---------------
(1) In accordance with the provisions of Statement of Position 76-3, "Accounting
Practices for Certain Employee Stock Ownership Plans" and allowable under
the transition provisions of Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," interest expense excludes
interest related to the guaranteed ESOP note, but includes interest
recognized in connection with the Company's contribution to the ESOP Plan.

13. LEASES

The Company and its subsidiaries lease retail stores, warehouse facilities
and office facilities over periods generally ranging from 5 to 20 years and
generally has options to renew such terms over periods ranging from 5 to 15
years.
30

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of the future minimum lease payments under capital
leases, rental payments required under operating leases, and future minimum
sublease rentals, excluding lease obligations for closed stores, at December 31,
1996:

CAPITAL OPERATING
LEASES LEASES
------- --------
(IN MILLIONS)

1997...................................................... $ .6 $ 359.1
1998...................................................... .6 339.4
1999...................................................... .6 311.0
2000...................................................... .4 284.5
2001...................................................... .4 253.3
Thereafter................................................ 1.6 1,548.6
------ --------
--
$ 4.2 $3,095.9
Less amount representing interest......................... (2.1)
------ --------
--
Present value of minimum lease payments................... $ 2.1
======== ========
Total future minimum sublease rentals..................... $ -- $ 30.8
======== ========

Following is a summary of net rental expense for operating leases relating
to continuing operations for the years ended December 31:

1996 1995 1994
------ ------ ------
(IN MILLIONS)

Minimum rentals.................................. $316.4 $299.4 $266.5
Contingent rentals based on sales................ 71.7 61.3 52.3
------ ------ ------
388.1 360.7 318.8
Less sublease rentals............................ (10.1) (7.7) (7.7)
------ ------ ------
$378.0 $353.0 $311.1
====== ====== ======

14. CONTINGENCIES

In connection with certain dispositions completed between 1991 and 1996,
the Company continues to guarantee lease obligations for approximately 2,600
former stores. The Company is indemnified for these obligations by the
respective purchasers. Assuming that each respective purchaser became insolvent,
an event which the Company believes to be highly unlikely, management estimates
that it could settle these obligations for approximately $1.3 billion at
December 31, 1996. In the opinion of management, the ultimate disposition of
these guarantees will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or future cash flows.

The Company is also a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management and the Company's outside
counsel, the ultimate disposition of these lawsuits, exclusive of potential
insurance recoveries, will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or future cash flows.

15. STOCK INCENTIVE PLANS

As discussed in Note 2, the Company applies APB Opinion No. 25 and related
interpretations to account for its stock incentive plans. Pro forma disclosures
as if the Company adopted the cost recognition requirements of SFAS No. 123 are
presented below.
31

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1996, the Company had stock incentive plans described below
that include the pre-merger plans of Revco. Effective with the Merger, and in
accordance with the terms of the Revco stock incentive plans, each outstanding
option to purchase Revco common stock was exchanged for .8842 options to
purchase CVS common stock.

1990 OMNIBUS STOCK INCENTIVE PLAN

The Company's 1990 Omnibus Stock Incentive Plan (the "Omnibus Plan"), as
amended, provides for the granting of up to 9,238,942 shares of common stock to
key employees in the form of options, restricted stock and other stock-based
awards. In 1996, the maximum number of shares available for grant was adjusted
for the effect of the Footstar Distribution. The Omnibus Plan replaced the
Company's 1973 and 1987 Stock Option Plans and the 1980 Restricted Stock Plan
(collectively, the "Previous Employee Plans").

Stock options granted under the Omnibus Plan are awarded at fair market
value on the date of grant. The right to exercise these options generally
commences between one and three years from the date of the grant and expires ten
years after the date of the grant, provided that the option holder continues to
be employed by the Company (except the Revco options, which became excercisable
as a result of the Merger).

THE 1996 DIRECTORS STOCK PLAN

The 1996 Directors Stock Plan (the "1996 Directors Plan"), provides for the
granting of up to 173,230 shares of common stock to the Company's non-employee
directors (the "Eligible Directors"). In 1996, the maximum number of shares
available for grant was adjusted for the effect of the Footstar Distribution.
Eligible Directors (i) are entitled to receive an annual grant of 347 shares of
common stock, (ii) are paid one-half of their annual retainer fee in shares of
common stock and (iii) may elect to receive common stock as compensation for
certain other services rendered. In addition, Eligible Directors may elect to
defer compensation payable in common stock until their service as a director
concludes. In this case, Eligible Directors are entitled to receive dividend
equivalent credits on their deferred shares. The 1996 Directors Plan replaced
the Company's 1989 Directors Stock Option Plan (the "Previous Directors Plan").

In connection with the termination of certain retirement benefits, the 1996
Directors Plan provided each Eligible Director the option to receive the
actuarial present value of these benefits in the form of a common stock grant in
lieu of receiving the previously accrued benefit in pension payments upon
retirement. All Eligible Directors elected to receive the common stock grant and
to defer the grant until their service as a director concludes. The impact of
this grant was not material to the Company's results of operations.

THE 1992 REVCO LONG-TERM INCENTIVE PLAN

The 1992 Revco Long-Term Incentive Plan (the "Revco Incentive Plan")
provided for the granting of stock awards to officers and other key employees of
Revco. The stock awards consisted of non-qualified stock options, restricted
stock awards and other performance awards. A maximum of 6,520,000 shares of
common stock were reserved for issuance under this plan.

THE 1992 REVCO NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

The 1992 Revco Long-Term Incentive Plan (the "Revco Directors Plan")
provided for the granting of non-qualified stock options to certain non-employee
directors of Revco. A maximum of 270,000 shares of common stock were reserved
for issuance under this plan.

Non-qualified stock options granted under the Revco Incentive Plan and the
Revco Directors Plan provided the option to purchase common stock over a 10-year
period, at a price not less than the fair market value on the date of grant. On
each anniversary of the date of grant, the exercise price for each non-vested
option increased by an amount equal to 5% of the option price then in effect.
32

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of the activity in the various stock incentive plans
discussed above:

1996 1995 1994
--------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES(1) EXERCISE PRICE SHARES(1) EXERCISE PRICE
---------- -------------- ---------- -------------- --------- --------------

Outstanding at beginning
of year............... 10,669,028 $29.84 7,238,636 $28.23 6,014,378 $31.82
Granted................. 2,773,180 29.33 3,735,552 31.40 1,589,120 26.10
Exercised............... (1,514,061) 24.15 (188,876) 14.92 (234,123) 21.95
Canceled................ (2,416,021) 36.32 (116,284) 21.04 (118,409) 23.61
---------- ------ ---------- ------ --------- ------
Outstanding at end of
year.................. 9,512,126 $29.10 10,669,028 $29.84 7,250,966 $32.49
---------- ====== ========== ====== ========= ======
Options exercisable at
year-end.............. 4,759,432
==========

- ---------------
(1) The shares outstanding at the end of 1994 do not equal the shares
outstanding at the beginning of 1995 due to the effect of the CVS and Revco
years combined. See Note 1.

Following is a summary of fixed stock options outstanding at December 31,
1996:

OPTIONS OUTSTANDING
- ------------------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING OPTIONS EXERCISABLE
YEARS OF --------------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- --------- ---------------- ---------------- ----------- ----------------

$9.90 to $13.21.. 1,028,678 5.60 $11.30 765,806 $11.11
14.10 to 22.56.. 1,084,504 7.20 21.62 498,194 21.17
23.14 to 35.72.. 5,923,615 8.08 30.68 2,020,104 31.80
36.85 to 39.72.. 786,632 5.76 39.14 786,632 39.14
40.05 to 47.71.. 688,697 4.71 42.85 688,697 42.85
---------- ---- ------ --------- ------
$9.90 to $47.71.. 9,512,126 7.28 $29.14 4,759,433 $30.17
========= ==== ====== ========= ======

The number of shares and the weighted-average exercise prices included in
the above tables have been restated to reflect the effect of the Footstar
Distribution.

At December 31, 1996, approximately 2.8 million of the 9.5 million stock
options outstanding were held by employees of divisions sold or to be sold, by
employees terminated under the Company's strategic restructuring program or by
employees that will be terminated as a result of the Merger. These individuals
may exercise their options for a 90 day period following termination.

The Omnibus Plan also permits the granting of performance share awards,
representing rights to receive common stock grants based upon certain
performance criteria over a three-year performance period, and performance based
restricted share awards, representing rights to receive common stock grants
based upon certain performance criteria over a one-year performance period.
Compensation expense related to grants under these provisions is based on the
current market price of the Company's common stock and the extent to which the
performance criteria is being met.
33

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of performance shares and performance based
restricted shares for the years ended December 31:

1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)

Units awarded.................................... -- 32,297 77,376
Fair market value of units awarded............... -- $1.2 $2.9
Shares granted related to units previously
awarded........................................ 35,380 60,807 42,051
Fair market value of shares granted.............. $1.3 $2.2 $1.6

The weighted-average grant date fair value of performance shares and
performance based restricted shares granted in 1996, 1995 and 1994 was $37.01,
$35.79 and $37.19, respectively.

Restricted stock awards are currently granted under the Omnibus Plan only
in connection with the hiring or retention of key executives and are subject to
certain conditions. Restrictions are lifted generally three or four years after
the date of grant, provided that the executive continues to be employed by the
Company.

Following is a summary of restricted stock awards for the years ended
December 31:

1996 1995 1994
------- ------- ------
(DOLLARS IN MILLIONS)

Shares granted................................. 254,656 112,773 55,050
Fair market value of shares granted............ $8.3 $4.1 $1.9
Shares canceled................................ 63,543 11,452 1,535

The weighted-average grant date fair value of restricted stock granted in
1996, 1995 and 1994 was $34.93, $32.54 and $34.97, respectively.

At December 31, 1996, there were 3,072,183 shares available for grant under
the Omnibus Plan and 150,078 shares available for grant under the 1996 Directors
Plan.

Compensation cost recognized in net earnings under the Company's
stock-based compensation plans amounted to $3.9 million in 1996, $3.3 million in
1995 and $1.4 million in 1994. Had compensation cost for the Company's 1996 and
1995 grants under its stock-based compensation plans been determined consistent
with SFAS No. 123, the Company's net earnings and net earnings per common share
for 1996 and 1995 would approximate the pro forma amounts shown below:

1996 1995
------ -------
(IN MILLIONS,
EXCEPT
PER SHARE AMOUNTS)

Net earnings (loss):
As reported............................................. $176.6 $(572.8)
Pro forma............................................... 169.5 (577.9)
Net earnings (loss) per common share:
As reported............................................. $ .98 $ (3.59)
Pro forma............................................... .93 (3.62)

The weighted-average grant date fair value of options granted during 1996
and 1995 was $10.94 and $8.14 per option, respectively. The fair value of each
CVS option grant was estimated using the Black-Scholes Option Pricing Model with
the following weighted average assumptions for 1996 and 1995: a dividend yield
of 1.07%; an expected volatility of 20.51%, a risk free interest rate of 7.0%
and an expected life of 5.0 years and 4.1 years, respectively. The fair value of
each Revco option grant was also estimated using the Black-Scholes Option
Pricing Model with the following weighted average assumptions for 1996 and 1995:
a dividend yield of 0%; an expected volatility of 36%, a risk free interest rate
of 5.5% and an expected life of 7.0 years.
34

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No.123 does not apply to awards prior to
1995.

16. CAPITAL STRUCTURE

On November 20, 1996, the Company changed its state of incorporation from
New York to Delaware. The Certificate of Incorporation provides for the
authorization of 350,120,619 shares of capital stock of which 300,000,000 shares
are common stock, $.01 par value per share, 120,619 are cumulative preferred
stock, $.01 par value per share and 50,000,000 shares are preference stock,
$1.00 par value per share.

In connection with managing the Company's stock incentive plans, 842,900
shares of common stock were reacquired in 1995 at a cost of $26.3 million. No
shares were reacquired in 1996.

17. REDEEMABLE PREFERRED STOCK

At December 31, 1995, 17,269 shares of cumulative preferred stock, Series
B, $4.00 dividend, redeemable at $100 plus accrued dividends were issued and
outstanding. During 1996, the Company redeemed these shares at a cost of $1.3
million plus accrued dividends.

18. RETIREMENT INCOME PLANS

The Company has a non-contributory defined benefit pension plan (the
"Retirement Income Plan"). This plan covers certain full-time employees of Revco
who are 20 1/2 years of age with six months of service and who are not covered
by collective bargaining agreements. Benefits paid to retirees are based upon
age at retirement, years of credited service and average compensation during the
final five years of employment. It is the policy of the Company to fund its plan
at amounts required by the applicable regulations. The Company made cash
contributions of $2.3 million, $2.6 million and $7.8 million in 1996, 1995 and
1994.

Following is a summary of the components of net periodic pension cost:

1996 1995 1994
------ ------ ------
(IN MILLIONS)

Service cost-benefits............................ $ 7.9 $ 7.3 $ 7.1
Interest cost.................................... 14.3 11.9 10.3
Return on plan assets............................ (18.2) (18.6) (10.8)
Net amortization and deferral.................... 5.5 5.1 (.1)
------ ------ ------
Net periodic pension cost........................ $ 9.5 $ 5.7 $ 6.5
====== ====== ======

The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet:

1996 1995
------ ------
(IN MILLIONS)

Accumulated benefit obligations, including vested benefits
of $169.5 and $151.1, respectively....................... $177.8 $159.6
====== ======
Projected benefit obligation............................... $202.6 $179.3
Plan assets at fair value.................................. 172.8 150.8
====== ======
Projected benefit obligation in excess of plan assets...... 29.8 28.5
Unrecognized net loss...................................... (9.3) (13.5)
Unrecognized prior service cost............................ (2.9) (3.1)
------ ------
Accrued pension cost....................................... $ 17.6 $ 11.9
====== ======

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of the assumptions used to measure the actuarial
present value of the projected benefit obligation

1996 1995
---- ----

Assumed discount rate........................................ 7.75% 7.75%
Assumed rate of compensation increase........................ 4.50% 4.50%
Assumed rate of return on plan assets........................ 9.00% 9.00%
==== ====

Plan assets primarily consist of mutual funds, with the balance invested in
money market funds, common stock and insurance contracts.

In addition to the above mentioned plans, and pursuant to various labor
agreements, the Company is required to make contributions to various
union-administered pension plans which aggregated $1.2 million, $1.2 million,
and $1.3 million in 1996, 1995 and 1994, respectively. The Company may be liable
for its share of the plans' unfunded liabilities if the plans are terminated.

19. POSTRETIREMENT BENEFITS

The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.

The weighted average discount rate used to determine the accumulated
postretirement benefit obligation (the "APBO") was 7.5% and 6.9% at December 31,
1996 and 1995, respectively.

Following is a summary of the accrued postretirement benefit cost at
December 31:

1996 1995
---- -----
(IN MILLIONS)

Retirees...................................................... $3.8 $16.6
Fully eligible active plan participants....................... .1 1.4
Other active plan participants................................ .1 10.8
---- -----
APBO.......................................................... 4.0 28.8
Unrecognized prior service gain............................... 1.2 13.1
Unrecognized net gain......................................... 1.7 8.0
---- -----
Accrued postretirement benefit cost........................... $6.9 $49.9
==== =====

In 1992, the Company amended these plans to terminate certain benefits. The
amendment resulted in a prior service gain of $16.7 million. The prior service
gain is being amortized over 13 years. The decrease in the accrued
postretirement benefit cost from December 31, 1995 to December 31, 1996 is
primarily due to the Footstar Distribution.

Following is a summary of the net periodic cost recorded for the years
ended December 31:

1996 1995 1994
---- ---- ----
(IN MILLIONS)

Interest expense....................................... $1.6 $2.0 $2.0
Service cost(1)........................................ (.7) (.9) (.5)
---- ---- ----
$ .9 $1.1 $1.5
==== ==== ====

- ---------------
(1) Net of prior service gain amortization.
36

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Primary assumptions used in determining costs and benefits obligations of
the principal retiree benefit plans are shown below:

1996 1995 1994
---- ---- ----

Discount rates........................................ 7.5% 6.9% 8.7%
Health care cost trend rates:
Initial............................................. 9.3% 10.0% 11.0%
Ultimate............................................ 5.0% 5.0% 6.0%
Years in which ultimate trend rate achieved........... 2005 2005 2010

A one percent increase in the healthcare cost trend would increase the APBO
by $.3 million at December 31, 1996 and the annual expense for 1996 by $.03
million.

20. EMPLOYEE STOCK OWNERSHIP PLAN

The Company sponsors a defined contribution plan for full-time employees
which includes its Employee Stock Ownership Plan (the "ESOP").

In 1989, the ESOP Trust borrowed $357.5 million through a 20-year loan that
is guaranteed by the Company. The proceeds from the loan were used to purchase
6,688,494 shares of ESOP convertible preference stock from the Company. The
original liquidation value of the ESOP convertible preference stock ($53.45) is
guaranteed by the Company. Each share of ESOP convertible preference stock is
convertible into 1.157 shares of common stock. The total number of new shares to
be allocated each year is calculated by multiplying (i) the ratio of each year's
debt service payment to total current and future debt service payments by (ii)
the number of unallocated shares of ESOP preference stock in the plan. At
December 31, 1996, 5.6 million shares were outstanding, of which, .8 million
shares were allocated to participants, .4 million shares were committed to be
released and the remaining 4.0 million shares were held in the ESOP Trust for
future allocations. At December 31, 1996, the fair value of the allocated shares
was approximately $64 million. The Company is required to repurchase at the
original liquidation value, for cash or common stock at the Company's option,
the ESOP convertible preference stock allocated to participants upon
distribution to the participant. Dividends are cumulative at the stated rate or
the common rate if higher.

Following is a summary of the ESOP for the years ended December 31:

1996 1995 1994
----- ----- -----
(IN MILLIONS)

Dividends paid...................................... $21.8 $49.2 $ --
Dividends accrued................................... -- -- 24.9
Annual dividends.................................... 21.8 24.3 24.9
Tax benefit of annual dividends..................... 8.8 9.8 10.0
Cash contributions.................................. 19.3 14.2 11.1
Interest costs incurred by the ESOP Trust........... 27.5 28.4 29.0
Compensation expense recognized(1).................. 3.4 6.2 5.9
Interest expense recognized(1)...................... 12.0 6.4 5.3
===== ===== =====

- ---------------
(1) Amounts include discontinued operations.

The Company's contribution to the ESOP, plus the dividends paid on the ESOP
convertible preference stock held by the ESOP Trust, are used to repay the loan
principal and interest. The Company has reflected the guaranteed ESOP obligation
as long-term debt on the consolidated balance sheets. The ESOP obligation is
collateralized by the unallocated shares of ESOP convertible preference stock. A
corresponding amount of "Guaranteed ESOP obligation" is recorded as a reduction
of shareholders' equity. The ESOP convertible
37

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

preference stock is not considered when computing primary earnings per share,
but is considered when computing fully diluted earnings per share. In connection
with the Company's strategic restructuring program, approximately 300,000 shares
of ESOP convertible preference stock will be converted to common stock in 1997.
Based on the market price of the Company's common stock at December 31, 1996,
these conversions will result in an expense of $3.5 million. This expense was
provided for in the 1995 restructuring charge.

21. 401(K) PLANS

The Company has certain 401(k) plans available to full-time employees who
meet the plan's eligibility requirements.

The 401(k) Profit Sharing Plan, which is also a defined contribution plan,
contains a profit sharing component that makes tax deferred contributions to
each employee based on certain performance criteria. The plan permits employees
to make contributions up to the maximum limits allowed by Internal Revenue Code
Section 401(k). Under the 401(k) component, the Company matches a portion of the
employees' contribution under a predetermined formula based on the employees
contribution level and years of vesting service.

The 401(k) Savings Plan is funded by voluntary employee contributions and
by the Company contributions equal to a certain percentage of employee
contributions. Employees' interests in Company contributions vest over five
years.

Following is a summary of the total cost of the plans:

1996 1995 1994
----- ----- -----
(IN MILLIONS)

401(k) Profit Sharing Plan.......................... $22.4 $21.7 $18.0
401(k) Savings Plan................................. 3.1 2.7 1.3
----- ----- -----
$25.5 $24.4 $19.3
===== ===== =====

22. EMPLOYEE STOCK PURCHASE PLAN

The Company's 1993 Employee Stock Purchase Plan (the "Revco Stock Purchase
Plan") enabled employees of Revco to subscribe to shares of common stock on
offering dates generally coinciding with the Company's fiscal year, at a
purchase price equal to the lessor of 85% of the fair market value of the common
stock on the first or last day of the offering period. During fiscal year 1996,
the Company's shareholders approved an increase in the maximum number of shares
of common stock reserved for issuance under the Revco Stock Purchase Plan from
1.2 million to 2.7 million. At December 31, 1996, 1,763,293 shares remained
available for issuance.

23. INCOME TAXES

Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
38

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's income tax (provision) benefit for continuing operations for
the years ended December 31 consisted of the following:

FEDERAL STATE TOTAL
------- ------ -------
(IN MILLIONS)

1996:
Current...................................................... $(179.3) $(52.3) $(231.6)
Deferred..................................................... (16.9) (2.8) (19.7)
------- ------ -------
$(196.2) $(55.1) $(251.3)
======= ====== =======
1995:
Current...................................................... $(130.7) $(14.2) $(144.9)
Deferred..................................................... 84.6 1.9 86.5
------- ------ -------
$ (46.1) $(12.3) $ (58.4)
======= ====== =======
1994:
Current...................................................... $ (54.1) $(15.7) $ (69.8)
Deferred..................................................... (45.9) (13.4) (59.3)
------- ------ -------
$(100.0) $(29.1) $(129.1)
======= ====== =======

Following is a reconciliation of the Company's effective tax rate to the
U.S. statutory income tax rates for the years ended December 31:

1996 1995 1994
------- ------ -------

Percent of pre-tax income...................................... 42.4% 50.3% 44.4%
State income taxes, net of Federal tax benefit................. (5.7) (6.6) (6.4)
Goodwill and other............................................. (1.7) (8.7) (3.0)
---- ---- ----
Statutory income tax rate...................................... 35.0% 35.0% 35.0%
==== ==== ====

Following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31:

1996 1995
------- ------
(IN MILLIONS)

Deferred tax assets:
Property and equipment............................. $ 82.0 $115.4
Employee benefits.................................. 81.6 107.2
Other assets....................................... 70.9 78.2
------- ------
Total deferred tax assets............................ 234.5 300.8
------- ------
Deferred tax liabilities:
Inventories........................................ (79.2) (65.8)
Other liabilities.................................. (23.1) (11.4)
------- ------
Total deferred tax liability......................... (102.3) (77.2)
------- ------
Net deferred tax assets.............................. $ 132.2 $223.6
======= ======

Based on historical pre-tax earnings, the Company believes it is more
likely than not that the deferred tax assets will be realized.

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Substantially all of Revco's NOLs are attributable to the time period prior
to Revco's emergence from Chapter 11. As previously discussed in Note 2, under
Fresh Start Reporting, the benefits realized from these NOLs should reduce
Reorganization Goodwill. Accordingly, the tax benefit of such NOLs utilized
during the three years ended December 31, 1996 (approximately $15.3 million,
$18.8 million and $17.0 million for 1996, 1995 and 1994, respectively), have not
been included in the computation of the Company's income tax provision, but
instead have been reflected as reductions of Reorganization Goodwill. When
realized, the tax benefit of the remaining NOL carryforward at May 31, 1996,
will also reduce Goodwill.

As discussed in Note 3, the Company completed the Footstar Distribution on
October 12, 1996. The Company believes that the Footstar Distribution should be
tax-free to the Company and its shareholders, based on a legal opinion provided
by outside counsel. However, since opinions of counsel are not binding on the
Internal Revenue Service or the courts, it could ultimately be determined that
the Footstar Distribution does not qualify as a tax-free distribution. If such
occurred, the Company would be required to recognize a capital gain for tax
purposes equal to the difference between the fair market value of the shares of
Footstar stock distributed and the Company's basis in such shares. The Company,
however, believes the likelihood of the Footstar Distribution not qualifying as
a tax-free distribution to be remote.

24. SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended December 31, the Company had the following non-cash
financing activities:

1996 1995 1994
------ ------ ------
(IN MILLIONS)

Fair value of assets acquired.................... $423.2 $ 4.8 $674.4
Cash paid........................................ 373.9 4.8 338.7
------ ------ ------
Liabilities assumed.............................. $ 49.3 $ -- $335.5
------ ------ ------
Stock or notes received for divisions sold....... $172.4 $175.0 $ --
====== ====== ======

Cash payments for income taxes and interest for the years ended December 31
were as follows:

1996 1995 1994
----- ------- -------
(IN MILLIONS)

Income tax refund (payment)..................... $49.2 $(116.4) $(113.0)
Interest, net of amounts capitalized............ $78.0 $ 62.5 $ 86.7
===== ======= =======

25. SUBSEQUENT EVENT

In February 1997, the Company recorded a non-recurring charge of $31.0
million ($18.6 million after tax) for certain non-capitalizable costs associated
with the restructuring of the Big B operations. The significant components of
the charge included: $5.3 million for store, distribution and MIS conversion
costs, $18.7 million for store closing costs, and $7.0 million for duplicate
headquarters and administration costs. In accordance with EITF 94-3, this
non-recurring charge includes accrued liabilities related to certain exit plans
for identified stores and duplicate corporate facilities. The charge primarily
includes costs related to the activities such as the cancellation of lease
agreements and the write-down of unutilized fixed assets. These exit plans do
not benefit the future activities of the retained stores or corporate
facilities.
40

CVS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

26. SUMMARY OF QUARTERLY RESULTS

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(UNAUDITED; IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Net sales:
1996..................................... $ 2,558.2 $ 2,674.7 $ 2,638.1 $ 3,073.8
1995..................................... 2,315.7 2,399.6 2,349.5 2,698.6
-------- -------- -------- --------
Gross margin:
1996..................................... 736.0 755.0 727.0 834.1
1995..................................... 663.6 695.5 659.5 728.3
-------- -------- -------- --------
Earnings (loss) from continuing operations
before extraordinary item:
1996..................................... 72.3 114.2 60.8 93.5
1995..................................... 48.9 60.2 23.0 (74.3)
-------- -------- -------- --------
Net earnings (loss):
1996..................................... 46.0 (39.3) 79.6 90.3
1995..................................... (5.5) 57.6 5.0 (629.9)
-------- -------- -------- --------
Earnings (loss) per common share from
continuing operations before
extraordinary item:
1996..................................... $ .42 $ .67 $ .34 $ .55
1995..................................... .27 .34 .11 (.47)
-------- -------- -------- --------
Net earnings (loss) per common share:
1996..................................... $ .26 $ (.26) $ .46 $ .52
1995..................................... (.06) .33 .01 (3.87)
======== ======== ======== ========

27. MARKET INFORMATION

CVS Corporation's common stock is listed on the New York Stock Exchange.
Its trading symbol is CVS. Information with respect to quarterly trading ranges
(based on low/high sales prices), dividends paid per share and the number of
record shareholders is summarized as follows:

1ST QUARTER 2ND QUARTER 3RD QUARTER
----------- ----------- -----------
(UNAUDITED)

Market price per share(1):
1996........................ $27(1/4) - $36(3/8) $35(1/4) - $44(1/2) $36(5/8) - $46
1995........................ 30(5/8) - 37(1/2 33(5/8) - 39(7/8) 32(3/4) - 37(1/4)
----------------- ----------------- ----------------
Dividends paid per share:
1996........................ $.11 $.11 $.11
1995........................ .38 .38 .38
----------------- - --------------- ----------------

4TH QUARTER YEAR
------------------ -----------------

Market price per share(1):
1996........................ $36(3/8) - $44(3/4) $27(2) - $46
1995........................ 28(5/8) - 37(1/8) 28(5/8) - 39(7/8)
----------------- -----------------
Dividends paid per share:
1996........................ $.11 $ .44
1995........................ .38 1.52
----------------- -----------------
Number of common
shareholders(2):
1996........................ 5,700
1995........................ 6,500
=================

- ---------------
(1) The stock prices shown in the table above are actual trading prices of CVS
common stock and do not reflect any adjustment for the trading value of
Footstar when it commenced trading on the New York Stock Exchange on October
16, 1996.

(2) The number of common shareholders has not been adjusted for the effect of
the merger of CVS and Revco.
41

CVS CORPORATION

FIVE YEAR FINANCIAL SUMMARY

1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Results of operations(5):
Net sales........................... $10,944.8 $9,763.4 $8,762.0 $6,452.2 $5,874.2
Operating profit(1)(3).............. 553.6 445.7 376.3 284.9 341.2
Earnings (loss) from continuing
operations before extraordinary
item............................. 340.8 57.8 161.3 134.9 86.9
Comparable earnings from continuing
operations before extraordinary
item(1)(2)(3)(4)................. 275.5 184.7 161.3 134.9 121.5
Net earnings (loss)................... 176.6 (572.8) 375.7 374.8 154.6
Net earnings (loss) available to
common shareholders.............. 162.1 (589.8) 358.7 118.1 106.3
Dividends declared.................. 68.6 184.3 185.4 184.9 180.3
--------- -------- -------- -------- --------
Per common share:
Earnings (loss) from continuing
operations before extraordinary
item............................. $ 1.96 $ .25 $ .88 $ .79 $ .50
Comparable earnings from continuing
operations before extraordinary
item(1)(2)(3)(4)................. 1.57 1.02 .88 .79 .76
Net earnings (loss)................. .98 (3.59) 2.20 2.36 .98
Dividends........................... .44 1.52 1.52 1.52 1.48
--------- -------- -------- -------- --------
Financial Position:
Current assets...................... $ 3,528.9 $3,878.8 $3,739.5 $2,968.5 $2,981.3
Total Assets........................ 5,693.7 6,335.6 6,885.3 5,318.8 5,247.4
Current liabilities................. 2,122.8 2,561.1 2,332.2 1,633.3 1,680.0
Total long-term obligations and
redeemable preferred stock....... 1,254.6 1,092.6 991.4 565.9 629.7
--------- -------- -------- -------- --------
Percentage of net sales:
Operating profit(1)(2).............. 5.1% 4.6% 4.3% 4.4% 4.8%
Comparable earnings from continuing
operations before extraordinary
item(1)(2)(3)(4)................. 2.5 1.9 1.8 2.1 2.1
Net earnings (loss)................. 1.6 (5.9) 4.3 5.8 2.6
========= ======== ======== ======== ========

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(1) For comparative purposes, operating profit for 1995 excludes the effect of
$165.6 million of restructuring and asset impairment charges and $49.4
million of non-recurring operating charges. Operational profit for 1996
excludes the effect of the $12.8 million charge relating to the failed
merger of Rite Aid Corporation and Revco.

(2) Comparable earnings from continuing operations before extraordinary item and
comparable earnings per common share from continuing operations before
extraordinary item excludes the after-tax effect of the charges discussed in
Note (1) and (3).

(3) For comparative purposes, operating profit for 1992 excludes the effect of
$59.4 million of restructuring charges. Comparable earnings from continuing
operations before extraordinary item and comparable earnings per common
share from continuing operations before extraordinary item for 1992 excludes
the after-tax effect of this charge.

(4) For comparative purposes, comparable earnings from continuing operations
before extraordinary item and comparable earnings per common share from
continuing operations before extraordinary item excludes the after-tax
effect of the $121.4 million gain on sale of securities.

(5) Prior to the Merger, Revco's fiscal year ended on the Saturday closest to
May 31. In recording the business combination, Revco's consolidated
financial statements have been restated to a year ended December 31, to
conform with CVS' fiscal year-end. As permitted by the rules and regulations
of the Securities and Exchange Commission, Revco's fiscal years ended June
3, 1995, May 28, 1994 and May 29, 1993 have been combined with CVS' fiscal
years ended December 31, 1994, 1993 and 1992.