<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
For the Quarterly Period Ended Commission File Number
September 27, 1997 1-1011
CVS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 05-0494040
(State of Incorporation) (I.R.S. Employer Identification Number)
One CVS Drive, Woonsocket, Rhode Island 02895
(Address of principal executive offices)
Telephone: (401) 765-1500
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Common Stock, $.01 par value, outstanding at October 31, 1997:
172,206,843 shares
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<PAGE> 2
INDEX
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PAGE
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 27, 1997
and September 28, 1996 3
Consolidated Condensed Balance Sheets -
As of September 27, 1997 and December 31, 1996 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 27, 1997 and September 28, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Independent Accountants' Review Report 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
2
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Part I Item 1
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CVS CORPORATION
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 27, September 28, SEPTEMBER 27, September 28,
In millions, except per share amounts 1997 1996 1997 1996
======================================================================================================================
<S> <C> <C> <C> <C>
Net sales $3,080.3 $2,638.1 $9,401.8 $7,871.0
Cost of goods sold, buying and warehousing costs 2,240.8 1,911.1 6,855.8 5,653.0
- ----------------------------------------------------------------------------------------------------------------------
Gross margin 839.5 727.0 2,546.0 2,218.0
Selling, general and administrative expenses 638.6 583.6 1,938.9 1,681.6
Depreciation and amortization 59.3 47.6 167.7 141.3
Non-recurring charge -- -- 442.7 12.8
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Total operating expenses 697.9 631.2 2,549.3 1,835.7
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Operating profit (loss) 141.6 95.8 (3.3) 382.3
Gain on sale of securities -- 25.5 -- 102.1
Dividend income -- 0.1 -- 5.6
Interest expense, net (9.4) (16.4) (38.8) (60.7)
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Other (expense) income, net (9.4) 9.2 (38.8) 47.0
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Earnings (loss) from continuing operations before
income taxes and extraordinary item 132.2 105.0 (42.1) 429.3
Income tax provision 57.5 44.2 31.4 182.0
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Earnings (loss) from continuing operations before
extraordinary item 74.7 60.8 (73.5) 247.3
Discontinued operations:
Loss from operations, net of income tax
benefit of $31.0 in 1996 -- -- -- (54.8)
Estimated income (loss) on disposal, net of
income tax (provisions) benefit of $(12.4)
in 1997 and $(15.2) and $55.3 in 1996 -- 18.8 17.5 (106.2)
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Earnings (loss) from discontinued operations -- 18.8 17.5 (161.0)
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Earnings (loss) before extraordinary item 74.7 79.6 (56.0) 86.3
Extraordinary item, loss related to early retirement
of debt, net of tax benefit of $11.4 -- -- (17.1) --
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 74.7 79.6 (73.1) 86.3
Preferred dividends, net (3.4) (3.6) (10.3) (10.9)
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Net earnings (loss) available to common shareholders $ 71.3 $ 76.0 $ (83.4) $ 75.4
======================================================================================================================
PER COMMON SHARE:
Earnings (loss) from continuing operations
before extraordinary item $ 0.41 $ 0.34 $ (0.49) $ 1.43
Earnings (loss) from discontinued operations -- 0.12 0.10 (0.97)
Extraordinary item, net of tax -- -- (0.10) --
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.41 $ 0.46 $ (0.49) $ 0.46
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Weighted average common shares outstanding 174.1 166.6 171.7 165.9
======================================================================================================================
Dividends declared per common share $ 0.11 $ 0.11 $ 0.33 $ 0.33
======================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
Part I Item 1
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CVS CORPORATION
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 27,
1997 December 31,
In millions, except per share amounts (UNAUDITED) 1996
=========================================================================================================
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 151.9 $ 471.8
Investments -- 181.4
Accounts receivable, net 346.8 350.7
Inventories 2,499.8 2,328.2
Other current assets 328.8 196.8
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TOTAL CURRENT ASSETS 3,327.3 3,528.9
Property and equipment, net 955.7 965.5
Deferred charges and other assets 254.8 282.8
Goodwill, net 707.3 721.7
Reorganization value in excess of amounts allocated
to identifiable assets 112.3 194.8
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TOTAL ASSETS $ 5,357.4 $ 5,693.7
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LIABILITIES:
Accounts payable $ 1,167.2 $ 1,046.3
Accrued expenses 1,449.0 1,076.5
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TOTAL CURRENT LIABILITIES 2,616.2 2,122.8
Long-term debt 313.2 1,184.3
Other long-term liabilities 191.9 190.2
SHAREHOLDERS' EQUITY:
Preference stock; par value $1.00, 50 shares authorized;
Series One ESOP Convertible, liquidation value $53.45;
5.3 and 5.6 shares issued and outstanding at September 27,
1997 and December 31, 1996, respectively 285.8 298.6
Common stock; par value $.01, 300 shares authorized,
177.8 and 172.2 shares issued at September 27, 1997 and
December 31, 1996, respectively 1.8 1.7
Treasury stock at cost; 5.6 and 5.8 shares at September 27,
1997 and December 31, 1996, respectively (262.0) (273.1)
Guaranteed ESOP obligation (292.1) (292.1)
Capital surplus 1,030.3 875.9
Retained earnings 1,472.3 1,587.8
Other -- (2.4)
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TOTAL SHAREHOLDERS' EQUITY 2,236.1 2,196.4
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,357.4 $5,693.7
=========================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
Part I Item 1
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CVS CORPORATION
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
SEPTEMBER 27, September 28,
In millions 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 196.0 $ 267.1
===========================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (178.4) (227.0)
Proceeds from sale of investments 309.7 252.1
Proceeds from sale or disposal of assets 67.1 165.6
Acquisition, net of cash -- (13.4)
- -------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 198.4 177.3
===========================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt (879.8) (243.8)
Increase (decrease) in book overdrafts 55.1 (163.1)
Dividends paid (42.4) (99.1)
Proceeds from stock options exercised 152.8 20.2
- -------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (714.3) (485.8)
===========================================================================================
Net decrease in cash and cash equivalents (319.9) (41.4)
Cash and cash equivalents at beginning of period 471.8 145.2
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 151.9 $ 103.8
===========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
Part I Item 1
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CVS CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE 1
On May 29, 1997, CVS Corporation ("CVS") completed a merger with Revco
D.S., Inc. ("Revco"), hereafter collectively referred to as the Company,
pursuant to which approximately 60.3 million shares of CVS common stock were
issued in exchange 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 the Merger. 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 a consent decree with the Federal Trade Commission entered
into in connection with the Merger, the Company divested 120 Revco stores,
primarily in the Richmond, Virginia area.
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 related restructuring activities. Following is a
summary of the significant components of the charge:
<TABLE>
<CAPTION>
MERGER UTILIZED RESERVE BALANCE
In millions CHARGE IN 1997 AT 9/27/97
------------------------------------------------------------------
<S> <C> <C> <C>
Merger transaction costs $ 35.0 $32.1 $ 2.9
Restructuring costs:
Employee severance 89.8 19.9 69.9
Exit costs 286.9 39.7 247.2
------------------------------------------------------------------
$411.7 $91.7 $320.0
==================================================================
</TABLE>
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 CVS' and
Revco's administrative functions. These actions will result in the reduction of
approximately 1,000 employees, primarily in Revco's Twinsburg, Ohio
headquarters, through 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 through 1998. As of September 27, 1997, approximately $266.3 million
remained unpaid.
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 in the Revco stores. As of September 27, 1997,
approximately $11.2 million of this markdown reserve had been utilized.
6
<PAGE> 7
Part I Item 1
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CVS CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE 2
The accompanying consolidated condensed financial statements have been
prepared without audit, in accordance with the rules of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in accordance with such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the supplemental consolidated
financial statements as of December 31, 1996 and 1995 and for each of the years
in the three-year period ended December 31, 1996, in each case as restated for
the merger of CVS and Revco, included in the Company's Current Report on Form
8-K filed on July 17, 1997 (as amended by the Company's Current Report on Form
8-K/A filed on July 23, 1997). These supplemental consolidated financial
statements became the Company's historical consolidated financial statements
commensurate with the filing of Form 10-Q for the quarterly period ended June
28, 1997.
In the opinion of management, the accompanying consolidated condensed
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to present a fair statement of the Company's
results for the interim periods presented. Because of the influence of various
factors on the Company's operations, including certain holidays and other
seasonal influences, net earnings for any interim period may not be comparable
to the same interim period in previous years, nor necessarily indicative of
earnings for the full year.
NOTE 3
During the first quarter of 1997, the Company recorded a charge to
operating expenses of $31.0 million for certain non-capitalizable costs
associated with the restructuring of Big B, Inc., which the Company acquired in
1996. 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 charge includes accrued liabilities related to certain exit
plans for identified stores and duplicate corporate facilities, 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. As of September 27, 1997, $12.1 million of the
restructuring reserve had been utilized.
NOTE 4
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"). In June 1997, the Company redeemed all $144.9 million
aggregate principal amount of its 10.125% Senior Notes due June 1, 2002 (the
"Debt Redemption") at 105% of the principal amount plus accrued interest. In
addition, on June 25, 1997, the Company commenced an offer (the "Debt Tender
Offer") to purchase for cash any and all of the $140.0 million aggregate
principal amount of its 9.125% Senior Notes due January 15, 2000 under which
$120.8 million aggregate principal amount was repurchased at an average of
104.61% of the 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. The Bank Facility Repayment, Debt Redemption and Debt
Tender Offer (collectively, the "Revco Debt Retirement") were financed with cash
on hand and borrowings through the Company's commercial paper program.
As a result of the Revco Debt Retirement, the Company recorded an
after-tax charge of $17.1 million in the second quarter of 1997. This charge,
which includes early retirement premiums and the write-off of unamortized
finance costs, has been classified as an extraordinary item in the accompanying
consolidated condensed statements of operations.
7
<PAGE> 8
Part I Item 1
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CVS CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE 5
Primary earnings per share is computed by dividing (i) net earnings
after deducting the after-tax dividends on ESOP Preference Stock, by (ii) the
weighted average number of common shares outstanding during the period 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) net earnings after deducting the after-tax 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 is not
presented on the face of the consolidated condensed statements of operations in
accordance with APB Opinion No. 15, "Earnings Per Share."
NOTE 6
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". The statement, which is effective for fiscal years ending after
December 15, 1997, will be adopted by the Company during the fourth quarter of
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. The adoption of this statement is not
expected to have a material impact on reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These pronouncements are effective for fiscal years ending
after December 15, 1997. SFAS No. 130 establishes disclosure standards for the
components of comprehensive income in financial statements. SFAS No. 131
requires companies to report financial information based on how management
internally organizes information to make operating decisions and assess
performance. The Company does not currently expect to be impacted by SFAS No.
130. The Company is presently evaluating the applicability of SFAS No. 131.
8
<PAGE> 9
Part I Independent Accountants' Review Report
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The Board of Directors and Shareholders of
CVS Corporation:
We have reviewed the consolidated condensed balance sheets of CVS
Corporation as of September 27, 1997 and September 28, 1996, and the related
consolidated condensed statements of operations for the three and nine months
then ended and cash flows for the nine months then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated condensed financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of CVS Corporation as of
December 31, 1996 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated July 16, 1997, based on our audit and the
report of the other auditors, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1996, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
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KPMG PEAT MARWICK LLP
Providence, Rhode Island
October 22, 1997
9
<PAGE> 10
Part I Item 2
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
THE CVS/REVCO MERGER
On May 29, 1997, CVS Corporation ("CVS") completed a merger with Revco
D.S., Inc. ("Revco"), hereafter collectively referred to as the Company,
pursuant to which approximately 60.3 million shares of CVS common stock were
issued in exchange 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 the Merger. 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 a consent decree with the Federal Trade Commission entered
into in connection with the Merger, the Company divested 120 Revco stores,
primarily in the Richmond, Virginia area.
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 related restructuring activities. Following is a
summary of the significant components of the charge:
<TABLE>
<CAPTION>
MERGER UTILIZED RESERVE BALANCE
In millions CHARGE IN 1997 AT 9/27/97
---------------------------------------------------------------------
<S> <C> <C> <C>
Merger transaction costs $ 35.0 $32.1 $ 2.9
Restructuring costs:
Employee severance 89.8 19.9 69.9
Exit costs 286.9 39.7 247.2
---------------------------------------------------------------------
$411.7 $91.7 $320.0
=====================================================================
</TABLE>
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 CVS' and
Revco's administrative functions. These actions will result in the reduction of
approximately 1,000 employees, primarily in Revco's Twinsburg, Ohio
headquarters, through 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 through 1998. As of September 27, 1997, approximately $266.3 million
remained unpaid.
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 in the Revco stores. As of September 27, 1997,
approximately $11.2 million of this markdown reserve had been utilized.
10
<PAGE> 11
Part I Item 2
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
The following discussion explains material changes in the results of
operations of the Company for the three and nine months ended September 27,
1997. This discussion should be read in conjunction with the supplemental
consolidated financial statements as of December 31, 1996 and 1995 and for each
of the years in the three-year period ended December 31, 1996, together with the
related supplemental Management's Discussion and Analysis of Financial Condition
and Results of Operations, in each case as restated for the merger of CVS and
Revco, included in the Company's Current Report on Form 8-K filed on July 17,
1997 (as amended by the Company's Current Report on Form 8-K/A filed on July 23,
1997).
The results of operations of the Company's former footwear, apparel and
toys and home furnishings segments have been classified as discontinued
operations in the accompanying consolidated condensed statements of operations
for all periods presented. The following discussion focuses primarily on
continuing operations.
THIRD QUARTER (1997 versus 1996)
NET SALES for the third quarter of 1997 increased $442.2 million or
16.8% to $3.1 billion, compared to net sales of $2.6 billion for the third
quarter of 1996. Same store sales rose 10.4%, with pharmacy same store sales
increasing 17.5%. Pharmacy sales were 55% of total sales in 1997, compared to
52% in 1996. As of September 27, 1997, the Company operated 3,909 stores in 24
states and the District of Columbia, compared to 3,608 as of September 28, 1996.
GROSS MARGIN for the third quarter of 1997 increased $112.5 million or
15.5% to $839.5 million, compared to $727.0 million for the third quarter of
1996. Gross margin as a percentage of net sales for the third quarter of 1997
was 27.3%, compared to 27.6% for the third quarter of 1996. The 30 basis point
decline in 1997 was primarily due to the continued increase in lower gross
margin third party prescription sales and pharmacy sales as a percentage of
total sales.
TOTAL OPERATING EXPENSES for the third quarter of 1997 decreased to
22.7% of net sales, or $697.9 million, compared to 23.9% of net sales, or $631.2
million for the third quarter of 1996. The 120 basis point improvement in
operating expenses as a percentage of net sales was primarily due to the
benefits derived from: (i) sales in the Company's existing store base growing at
a faster rate than operating costs, (ii) the CVS Strategic Restructuring
Program, (iii) the consolidation of CVS' and Revco's administrative functions,
(iv) store operating improvements and (v) key technology investments such as the
Company's 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 (collectively, the "Operating Expense
Improvement Factors").
OPERATING PROFIT for the third quarter of 1997 increased $45.8 million
or 47.8% to $141.6 million, compared to $95.8 million for the third quarter of
1996.
OTHER (EXPENSE) INCOME, NET for the third quarter of 1997 amounted to an
expense of $9.4 million, compared to income of $9.2 million for the third
quarter of 1996. The decrease was primarily due to the $25.5 million gain that
was realized in the third quarter of 1996 upon the sale of certain equity
securities received as part of the proceeds from the sale of the Marshalls
division to The TJX Companies, Inc. ("TJX"). The effect of the 1996 gain was
offset, in part, by the $7.0 million decrease in net interest expense during the
third quarter of 1997 which resulted primarily from improved working capital
management and the Revco Debt Retirement discussed below.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM for
the third quarter of 1997 increased $13.9 million or 22.8% to $74.7 million, or
$0.41 per share, compared to $60.8 million, or $0.34 per share, for the third
quarter of 1996. Excluding the effect of the $25.5 million gain on sale of
securities in the third quarter of 1996, earnings from continuing operations
before extraordinary item increased $29.8 million or 66.4% to $74.7 million, or
$0.41 per share, compared to $44.9 million, or $0.25 per share for the third
quarter of 1996.
11
<PAGE> 12
Part I Item 2
================================================================================
Management's Discussion and Analysis of Financial Condition
and Results of Operations
NET EARNINGS for the third quarter of 1997 decreased $4.9 million to
$74.7 million, or $0.41 per share, compared to $79.6 million, or $.46 per share,
for the third quarter of 1996.
NINE MONTHS (1997 versus 1996)
NET SALES for the first nine months of 1997 increased $1.5 billion or
19.4% to $9.4 billion, compared to $7.9 billion for the first nine months of
1996. Same store sales rose 10.8%, with pharmacy same store sales increasing
17.5%. Pharmacy sales were 55% of total sales for the first nine months of 1997,
compared to 51% for the first nine months of 1996.
GROSS MARGIN for the first nine months of 1997 increased $328.0 million
or 14.8% to $2.5 billion, compared to $2.2 billion in 1996. During the second
quarter of 1997, the Company recorded a charge of $75.0 million to cost of goods
sold to reflect markdowns on non-compatible Revco merchandise (the "Revco
Inventory Markdown"). Excluding the effect of the Revco Inventory Markdown,
gross margin increased $403.0 million or 18.2% to $2.6 billion.
Gross margin as a percentage of net sales for the first nine months of
1997 was 27.1%, compared to 28.2 % in 1996. Excluding the effect of the Revco
Inventory Markdown, gross margin as a percentage of net sales was 27.9% for the
first nine months of 1997. The comparable 30 basis point decline in 1997 was
primarily due to the continued increase in lower gross margin third party
prescription sales and pharmacy sales as a percentage of total sales.
TOTAL OPERATING EXPENSES for the first nine months of 1997 were $2.5
billion or 27.1% of net sales, compared to $1.8 billion or 23.3% of net sales
for the same period in 1996. In order to properly evaluate the Company's total
operating expenses in these periods, it is important to note the following
non-recurring charges:
(i) During the second quarter of 1997, the Company recorded a $411.7
million charge for direct and other merger-related costs
pertaining to the Merger transaction and certain related
restructuring activities (the "Revco Restructuring Charge"). For
further discussion, see "The CVS/Revco Merger" above.
(ii) During the first quarter of 1997, the Company recorded a $31.0
million charge for certain non-capitalizable costs associated
with the restructuring of Big B, Inc., which the Company
acquired in 1996 (the "Big B Restructuring Charge"). 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
charge includes accrued liabilities related to certain exit
plans for identified stores and duplicate corporate facilities,
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.
(iii) During the second quarter of 1996, the Company recorded a $12.8
million charge upon Rite Aid Corporation's announcement that it
had withdrawn its tender offer to acquire Revco (the "Rite Aid
Charge").
Excluding the Revco Restructuring Charge and the Big B Restructuring
Charge in 1997 and the Rite Aid Charge in 1996, comparable operating expenses
for the first nine months of 1997 were $2.1 billion or 22.4% of sales, compared
to $1.8 billion or 23.5% of sales for the same period in 1996. The 110 basis
point improvement in comparable operating expenses as a percentage of net sales
was primarily due to the Operating Expense Improvement Factors discussed above.
12
<PAGE> 13
Item 2
================================================================================
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OPERATING PROFIT (LOSS) for the first nine months of 1997 decreased
$385.6 million to an operating loss of $3.3 million, compared to operating
profit of $382.3 million for the first nine months of 1996. Excluding the effect
of the Revco Inventory Markdown, the Revco Restructuring Charge and the Big B
Restructuring Charge in 1997 and the Rite Aid Charge in 1996 (collectively, the
"Non-recurring Charges"), comparable operating profit increased $119.3 million
or 30.2% to $514.4 million in 1997, compared to $395.1 million in 1996.
Comparable operating profit as a percentage of net sales was 5.5% for the first
nine months of 1997, compared to 5.0% in 1996.
OTHER (EXPENSE) INCOME, NET for the first nine months of 1997 amounted
to an expense of $38.8 million, compared to income of $47.0 million for the
first nine months of 1996. This decrease was primarily due to the $102.1 million
gain that was realized during 1996 upon the sale of certain equity securities
received as part of the proceeds from the sale of the Marshalls division to TJX
(the "TJX Gain"). The effect of the TJX Gain was offset, in part, by the $21.9
million decrease in net interest expense in 1997. This decrease in net interest
expense was primarily due to the lower average borrowing levels that resulted
from improved working capital management and the Revco Debt Retirement discussed
below.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM for
the first nine months of 1997 decreased $320.8 million to a loss of $73.5
million, compared to earnings of $247.3 million for the first nine months of
1996. Excluding the effect of the Non-recurring Charges and the TJX Gain,
comparable earnings from continuing operations before extraordinary item
increased $78.7 million or 41.4% to $268.7 million, or $1.51 per share in the
first nine months of 1997, compared to $190.0 million, or $1.08 per share for
the first nine months of 1996.
DISCONTINUED OPERATIONS - During the second quarter of 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 has been reflected in discontinued operations. In
conjunction 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 CVS Restructuring Charge which is discussed
below. During the second quarter of 1996, the Company recorded, as a component
of discontinued operations, a pre-tax charge of $235.0 million ($148.0 million
after-tax) (the "CVS Restructuring Charge") after receiving approval from its
Board of Directors to implement (i) a formal plan to separate the Linens `n
Things and Bob's divisions from the Company and (ii) a formal plan to convert 80
- - 100 of Thom McAn's stores to the Footaction store format and to sell or close
the remaining Thom McAn stores, and thereby exit the Thom McAn business by
mid-1997.
EXTRAORDINARY ITEM represents a $17.1 million after-tax charge that was
recorded in the second quarter of 1997 as a result of the Revco Debt Retirement.
This charge includes early retirement premiums and the write-off of unamortized
finance costs. For further discussion, see "Liquidity and Capital Resources"
below.
NET EARNINGS (LOSS) for the first nine months of 1997 was a net loss of
$73.1 million, or $0.49 per share, compared to net earnings of $86.3 million, or
$0.46 per share, for the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion explains the significant developments affecting
the Company's financial condition since December 31, 1996. This discussion
should be read in conjunction with the supplemental consolidated financial
statements as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996, together with the related
supplemental Management's Discussion and Analysis of Financial Condition and
Results of Operations, in each case as restated for the merger of CVS and Revco,
included in the Company's Current Report on Form 8-K filed on July 17, 1997 (as
amended by the Company's Current Report on Form 8-K/A filed on July 23, 1997).
13
<PAGE> 14
Part I Item 2
================================================================================
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has three primary sources of liquidity: (i) cash from
operations, (ii) commercial paper and (iii) unsecured credit lines.
Management believes that the Company's cash on hand and cash provided by
operations, together with its ability to secure short-term financing through its
commercial paper program and various lines of credit, will be sufficient to fund
its operational working capital needs, capital expenditure program, debt service
and cash outlay requirements related to the Merger.
Commercial paper is issued to finance, in part, the Company's 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. The commercial paper program is supported by a $670 million, five year
unsecured revolving credit facility which expires on May 30, 2002 (the "Credit
Facility"). The Credit Facility contains various customary financial and
operational covenants. Management believes that the restrictions contained in
these covenants do not materially affect the Company's financial flexibility.
In connection with the Merger, the Company obtained a $330 million, 364
day unsecured revolving line of credit due May 29, 1998 (the "Line of Credit").
As a result of its favorable debt position and improved working capital
management, the Company terminated the Line of Credit on October 17, 1997.
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 Repayment"). In June 1997, the Company redeemed all $144.9
million aggregate principal amount of its 10.125% Senior Notes due June 1, 2002
(the Debt Redemption") at 105% of the principal amount plus accrued interest. In
addition, on June 25, 1997, the Company commenced an offer (the "Debt Tender
Offer") to purchase for cash any and all of the $140 million aggregate principal
amount of its 9.125% Senior Notes due January 15, 2000 under which $120.8
million of the aggregate principal amount was repurchased at an average price of
104.61% of the 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. The Bank Facility Repayment, Debt Redemption and Debt
Tender Offer (collectively, the "Revco Debt Retirement"), were financed with
cash on hand and borrowings through the Company's commercial paper program.
Cash and cash equivalents were $151.9 at September 27, 1997, compared to
$103.8 million at September 28, 1996.
NET CASH PROVIDED BY OPERATING ACTIVITIES decreased $71.1 million to
$196.0 million for the first nine months of 1997, compared to the first nine
months of 1996 due to cash payments made pursuant to the Company's various
restructuring activities and to an increase in inventory offset, in part, by an
increase in accounts payable.
NET CASH PROVIDED BY INVESTING ACTIVITIES increased $21.1 million to
$198.4 million during the first nine months of 1997, compared to the first nine
months of 1996 primarily due to: (i) the lower level of capital expenditures in
1997 that resulted primarily from not having to fund the capital requirements of
the Company's discontinued operations, (ii) an increase in the proceeds received
from the sale of investments which were derived primarily from the sale of the
Company's remaining investment in Linens n' Things, Inc. and certain notes
receivable in 1997 and the sale of certain TJX equity securities in 1996. These
increases were offset, in part, by a decrease in the proceeds received from the
sale or disposal of assets, primarily of the Company's discontinued operations.
NET CASH USED IN FINANCING ACTIVITIES increased $228.5 million to $714.3
million during the first nine months of 1997, compared to the first nine months
of 1996 primarily due to the Revco Debt Retirement offset, in part, by a
decrease in book overdrafts and an increase in the proceeds received from stock
options exercised.
14
<PAGE> 15
Part I Item 2
================================================================================
Management's Discussion and Analysis of Financial Condition
and Results of Operations
CAPITAL EXPENDITURES for the first nine months of 1997 totaled $178.4
million, compared to $227.0 million in 1996. These expenditures were primarily
for (i) new stores, (ii) improvements to existing stores, (iii) store equipment,
(iv) information systems, (v) distribution and office facilities and (vi) the
integration of CVS and Revco. The lower level of capital expenditures in 1997
resulted primarily from not having to fund the capital requirements of the
Company's discontinued operations.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this Form 10-Q as well as in
other public filings, press releases and discussions with Company management
that are subject to risks and uncertainties. Forward-looking statements include
the information concerning future results of operations of the Company after
completion of the merger with Revco; the information concerning the Company's
ability to continue to achieve significant sales growth; the information
concerning the Company's 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 Form 10-Q (including the notes to the
consolidated condensed financial statements included herein), in our Annual
Report on Form 10-K for the year ended December 31, 1996, as amended, and in our
other public filings, press releases and discussions with Company management,
could affect the future results of the Company and could cause those results to
differ materially from those expressed in our forward-looking statements:
materially adverse changes in economic conditions generally in the markets
served by the Company; 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 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 the Company following the merger
with Revco, including: risks relating to the Company's 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 the
Company's management focus and resources from other strategic opportunities and
from operational matters for an extended period of time during the integration
process; the Company's ability to continue to secure suitable new store
locations on favorable lease terms and as it seeks to open new stores and
relocate a portion of its existing store base from strip shopping centers to
free standing locations; relationships with suppliers; the Company's ability to
continue to purchase inventory on favorable terms; and the Company's ability to
attract, hire and retain suitable pharmacists and management personnel.
15
<PAGE> 16
Part II Item 6
================================================================================
Exhibits and Reports on Form 8-K
Exhibits:
- ---------
11 Computation of Per Common Share Earnings
15 Letter re: Unaudited Interim Financial Information
27 Financial Data Schedule - September 27, 1997
Reports on Form 8-K:
- -------------------
On July 16, 1997, the Registrant filed a Current Report on Form
8-K in connection with complying with a covenant contained in its Merger
Agreement with Revco D.S., Inc. that required CVS to report interim
results for a period of at least 30 days following the effective time of
the merger of CVS Corporation and Revco D.S., Inc.
On July 17, 1997, the Registrant filed a Current Report on Form
8-K in connection with reporting interim results for the three and six
months ended June 28, 1997.
On July 17, 1997, the Registrant filed a Current Report on Form
8-K in connection with filing supplemental consolidated financial
statements as of December 31, 1996 and 1995 and for each of the years in
the three-year period ended December 31, 1996, together with the related
supplemental Management's Discussion and Analysis of Financial Condition
and Results of Operations, in each case as restated for the merger of
CVS Corporation and Revco D.S., Inc.
On July 23, 1997, the Registrant filed a Current Report on Form
8-K/A in connection with correcting the date of the report of Arthur
Andersen LLP on the consolidated statements of income, changes in
stockholders' equity and cash flows of Revco D.S., Inc. and Subsidiaries
for the fiscal year ended June 3, 1995 included as Exhibit 99.1 of
Registrant's Current Report on Form 8-K filed on July 17, 1997 which was
inadvertently dated July 27, 1997 rather than July 27, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CVS Corporation
(Registrant)
/s/ Charles C. Conaway
- -----------------------------------------------------
CHARLES C. CONAWAY
Executive Vice President and Chief Financial Officer
November 6, 1997
16
<PAGE> 1
Part II Exhibit 11
================================================================================
Computation of Per Common Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 27, September 28, SEPTEMBER 27, September 28,
In millions, except per share amounts 1997 1996 1997 1996
=======================================================================================================================
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER COMMON SHARE:
Net earnings (loss) $ 74.7 $ 79.6 $(73.1) $ 86.3
Less: Preference dividends, net (3.4) (3.6) (10.3) (10.9)
- -----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) used to calculate
primary earnings (loss) per common share $ 71.3 $ 76.0 $(83.4) $ 75.4
=======================================================================================================================
Weighted average common shares outstanding 171.7 165.5 168.7 165.1
Add: Weighted average number of shares which
could have been issued upon the exercise
of outstanding stock options 2.4 1.1 3.0 0.8
- -----------------------------------------------------------------------------------------------------------------------
Weighted average number of shares used to compute
primary earnings (loss) per common share 174.1 166.6 171.7 165.9
=======================================================================================================================
Primary earnings (loss) per common share $ 0.41 $ 0.46 $ (0.49) $ 0.46
=======================================================================================================================
FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net earnings (loss) $ 74.7 $ 79.6 $(73.1) $ 86.3
Less: Preference dividends, net -- -- (10.3) --
Less: Adjustments, assuming conversion of the Series
One ESOP Convertible Preference Stock, for the
following: (i) additional contributions to cover
the shortfall between the Series One ESOP
Convertible Preference Stock and Common Stock
dividends and (ii) reductions in incentive
bonuses and profit sharing, net of tax benefits (1.9) (1.6) -- (5.7)
- -----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) used to calculate fully diluted
earnings (loss) per common share $ 72.8 $ 78.0 $(83.4) $ 80.6
=======================================================================================================================
Weighted average common shares outstanding 171.7 165.5 168.7 165.1
Add: Weighted average number of shares which could
have been issued upon conversion of the Series
One ESOP Convertible Preference Shares 5.4 6.8 -- 6.8
Add: Weighted average number of shares which
could have been issued upon the exercise of
outstanding stock options 2.4 1.9 3.0 1.5
- -----------------------------------------------------------------------------------------------------------------------
Weighted average number of shares used to compute
fully diluted earnings (loss) per common share 179.5 174.2 171.7 173.4
=======================================================================================================================
Fully diluted earnings (loss) per common share $ 0.41 $ 0.45 $(0.49) $ 0.46
=======================================================================================================================
</TABLE>
17
<PAGE> 1
Part II Exhibit 15
================================================================================
Letter re: Unaudited Interim Financial Information
CVS Corporation
Woonsocket, Rhode Island
Board of Directors:
Re: Registration Statements Numbers 33-40251, 33-17181, 2-97913, 2-77397 and
2-53766 on Form S-8
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 22, 1997 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is
not considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG Peat Marwick LLP
- --------------------------------
KPMG PEAT MARWICK LLP
Providence, Rhode Island
November 5, 1997
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS, AND THE CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 151,900
<SECURITIES> 0
<RECEIVABLES> 368,900
<ALLOWANCES> 22,100
<INVENTORY> 2,499,800
<CURRENT-ASSETS> 3,327,300
<PP&E> 1,562,800
<DEPRECIATION> 607,100
<TOTAL-ASSETS> 5,357,400
<CURRENT-LIABILITIES> 2,616,200
<BONDS> 313,200
0
0
<COMMON> 1,800
<OTHER-SE> 2,234,300
<TOTAL-LIABILITY-AND-EQUITY> 5,357,400
<SALES> 9,401,800
<TOTAL-REVENUES> 9,401,800
<CGS> 6,855,800
<TOTAL-COSTS> 6,855,800
<OTHER-EXPENSES> 2,549,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,800
<INCOME-PRETAX> (42,100)
<INCOME-TAX> 31,400
<INCOME-CONTINUING> (73,500)
<DISCONTINUED> 17,500
<EXTRAORDINARY> (17,100)
<CHANGES> 0
<NET-INCOME> (73,100)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
