As filed with the Securities and Exchange Commission on May 15, 1998
Registration No. 333-52055
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CVS Corporation
(Exact Name of Registrant as specified in its charter)
Delaware 05-0494040
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
----------
One CVS Drive
Woonsocket, Rhode Island 02895
(401) 765-1500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Charles C. Conaway
Executive Vice President and Chief Financial Officer
CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
(401) 765-1500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------
Copies to:
<TABLE>
<S> <C> <C>
Dennis S. Hersch, Esq. Alan S. Schwartz, Esq. Robert E. Buckholz, Jr., Esq.
Deanna L. Kirkpatrick, Esq. Norman Beitner, Esq. Sullivan & Cromwell
Davis Polk & Wardwell Honigman Miller Schwartz and Cohn 125 Broad Street
450 Lexington Avenue 2290 First National Building New York, New York 10004
New York, New York 10017 Detroit, Michigan 48226-3583 (212) 558-4000
(212) 450-4000 (313) 256-7800
</TABLE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Number of Maximum Maximum
Shares to be Offering Price Aggregate Amount of
Title of Each Class of Securities to be Registered Registered(1) Per Share (2) Offering Price (2) Registration Fee
- -------------------------------------------------- ------------- ------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share(3)......... 3,047,500 $68.65625 $209,229,922 $61,723(4)
</TABLE>
(1) Includes 397,500 shares of Common Stock as to which the Underwriters have
been granted an option to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee based
upon the average of the reported high and low sales prices of the Common
Stock on the New York Stock Exchange on May 13, 1998.
(3) Up to 3,047,500 shares of Common Stock registered hereby may be delivered
upon the exchange of Trust Automatic Common Exchange Securities registered
on a separate registration statement on Form N-2 (Registration Nos.
333-41617 and 811-08539). Such number of shares of Common Stock that may
be delivered upon such exchange is subject to adjustment in accordance with
Rule 416. Since such shares of Common Stock are deliverable only upon the
exchange of Trust Automatic Common Exchange Securities for which a
registration fee is being paid pursuant to the registration statement
referenced above, no further registration fee with respect to such shares
is required pursuant to the provisions of Rule 457(i).
(4) $51,419 of which was previously paid upon the initial filing of the
registration statement.
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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EXPLANATORY NOTE
This Registration Statement relates to up to 2,650,000 shares
(or 3,047,500 shares if the Underwriters' over-allotment option is exercised
in full) of Common Stock, par value $.01 per share (the "Common Stock"), of
CVS Corporation (the "Company" or "CVS") that may be delivered by the CVS
Automatic Common Exchange Security Trust (the "Trust"), a non-diversified
closed-end management investment company, to holders of Trust Automatic Common
Exchange Securities of the Trust (the "Automatic Common Exchange Securities")
upon exchange of the Automatic Common Exchange Securities. The Automatic
Common Exchange Securities are being offered pursuant to a separate prospectus
of the Trust (the "Trust Prospectus") included in a registration statement on
Form N-2 (Registration Nos. 333-41617 and 811-08539). The Company is not
affiliated with the Trust and will not receive any of the proceeds from the
sale of the Automatic Common Exchange Securities. The Company will have no
obligations with respect to the Automatic Common Exchange Securities. The
Prospectus will be attached to the Trust Prospectus.
SUBJECT TO COMPLETION, DATED MAY 15, 1998
2,650,000 Shares
CVS
CVS Corporation
Common Stock
(par value $.01 per share)
This Prospectus relates to an aggregate of up to 2,650,000 shares
of Common Stock of the Company beneficially owned by the Selling Stockholder
identified under the heading "Selling Stockholder" that may be delivered by the
CVS Automatic Common Exchange Security Trust (the "Trust") to holders of the
Trust Automatic Common Exchange Securities of the Trust (the "Automatic Common
Exchange Securities") upon exchange of such securities on May , 2001 (3,047,500
shares assuming that the Underwriters' exercise the over-allotment option in
full). The Company will receive no portion of the proceeds of the sale of the
Common Stock offered hereby or of the sale of the Automatic Common Exchange
Securities. The Automatic Common Exchange Securities are being sold by the Trust
in an offering described in the attached prospectus of the Trust (the "Trust
Prospectus"). See "Trust Prospectus".
The Common Stock is currently traded on the New York Stock
Exchange under the symbol "CVS". On May 13, 1998, the last reported sale
price for the Common Stock on the New York Stock Exchange Composite Tape was
$68 7/8 per share. See "Price Range of Common Stock".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Goldman, Sachs & Co.
The date of this Prospectus is , 1998.
[Map of CVS store locations as of April 25, 1998]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND THE AUTOMATIC COMMON EXCHANGE SECURITIES, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
AVAILABLE INFORMATION
CVS Corporation ("CVS" or the "Company") is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy statements and other information filed by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
7th Floor, New York, New York 10048. Copies of such materials may be obtained
from the web site that the Commission maintains at http://www.sec.gov. In
addition, such material may also be inspected and copied at the offices of the
New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New
York 10005.
The Company has filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"). This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission
(file No. 1-1011) pursuant to the Exchange Act are incorporated herein by
reference:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "Company Form 10-K");
2. The Company's Quarterly Report on Form 10-Q for the first
quarter ended March 28, 1998 (the "Company Form 10-Q");
3. The Company's Current Reports on Form 8-K filed on February
11, 1998, March 4, 1998, March 27, 1998, April 3, 1998 and May 8, 1998;
4. The description of the Common Stock, par value $.01 per
share, of the Company (the "Common Stock") set forth in the Company's
Registration Statement on Form 8-B filed on November 4, 1996; and
5. All other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of the
Shares.
The Company will provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is
delivered, upon the written or oral request of such person, a copy of any or
all of the documents which are incorporated herein by reference, other than
exhibits to such information (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed
to Attention: Nancy R. Christal, Vice President, Investor Relations, CVS
Corporation, 670 White Plains Road, Suite 210, Scarsdale, New York, 10583,
(800) 201-0938.
Any statement contained in a document all or a portion of which
is incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified shall not be
deemed to constitute a part of this Prospectus except as so modified, and any
statement so superseded shall not be deemed to constitute part of this
Prospectus.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains and incorporates by reference certain
forward-looking statements that are subject to risks and uncertainties.
Forward-looking statements include information concerning: future results of
operations, revenue, sales growth, dispensing of retail prescriptions, cost
savings and synergies of the Company following the merger with Revco D.S.,
Inc. ("Revco") and the merger with Arbor Drugs, Inc. ("Arbor"); the ability of
the Company to elevate the performance level of Revco stores following the
merger with Revco; information concerning the ability of the Company to
continue to achieve significant sales growth; the Company's belief that it can
continue to improve operating performance by relocating existing stores to
freestanding locations; the Company's belief that it can continue to reduce
selling, general and administrative expenses as a percentage of net sales; the
Company's belief that it can reduce inventory levels by the end of 1998 and
the ability of the Company and its key vendors and suppliers to successfully
manage issues presented by the Year 2000; as well as those statements preceded
by, followed by or that otherwise include the words: "believes", "expects",
"anticipates", "intends", "estimates" or other similar expressions. For those
statements, CVS claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere in
this document and in the documents which are incorporated by reference, could
affect the future results of the Company and could cause those results to
differ materially from those expressed in the forward-looking statements:
materially adverse changes in economic conditions generally or in the markets
served by the Company; future regulatory and legislative actions affecting the
Company and/or the chain drugstore industry generally (such as the current
federal and state industry-wide inquiry into billing practices for Medicaid
prescriptions); 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 and the
merger with Arbor, including: risks relating to the Company's ability to
combine the businesses of three major corporations 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; the Company's ability to continue to secure suitable new store locations
on favorable lease terms as it seeks to open new stores and relocate a portion
of its existing store base to freestanding locations; the Company's ability to
continue to purchase inventory on favorable terms; the Company's ability to
attract, hire and retain suitable pharmacists and management personnel;
relationships with suppliers; and the impact of inflation.
THE COMPANY
Except as otherwise specified herein, the financial results of
the Company set forth below do not include the results of operations of Arbor.
In addition, none of the information contained herein reflects the two-for-
one stock split of the Common Stock declared on May 13, 1998. See "Recent
Developments".
General
CVS is a leader in the chain drugstore industry in the United
States. As of March 31, 1998, after giving effect to the merger with Arbor
discussed below, the Company operated approximately 4,100 stores in 25 states
in the Northeast, Mid-Atlantic, Midwest and Southeast regions and in the
District of Columbia, making CVS one of the largest drugstore chains in the
nation in terms of store count. The combined Company is expected to have
revenues of approximately $15 billion in 1998. The Company's stores are well
positioned, operating in 49 of the top 100 drugstore markets in the country.
CVS commands the number one or two share position in approximately 80% of
these markets. CVS is also among the industry leaders in terms of store
productivity and operating profit margin.
A primary focus of the Company's operations is its pharmacy
business, which represented approximately 54% of total sales for the year. In
1997, the Company dispensed over 225 million prescriptions, making it the
largest drugstore chain in the United States in terms of prescriptions filled
and pharmacy sales. The Company believes that its pharmacy operations will
continue to represent a critical part of its business and strategy due to
favorable trends, including an aging American population, greater
responsibility being borne by Americans for their healthcare, an increasing
demand for retail formats that provide easy access and convenience, discovery
of new and better drug therapies, and the need for cost effective healthcare
solutions.
In addition to prescription drugs and services, the Company
offers a broad selection of general merchandise, presented in a well-organized
fashion, in stores that are designed to be warm, inviting and easy to shop.
Merchandise categories include, among other things, over-the-counter drugs,
greeting cards, film and photo-finishing services, beauty and cosmetics,
seasonal merchandise and convenience foods. The Company also offers over
1,300 products under the CVS private label brand, which accounted for
approximately 11% of the Company's front store sales in 1997. Total front
store sales, which are generally higher margin than pharmacy sales,
represented approximately 46% of total sales for the year.
On May 29, 1997, CVS merged with Revco in an exchange of stock
that was accounted for as a pooling of interests. The merger resulted in CVS
becoming one of the largest chain drugstore companies in the United States
based on store count. On March 31, 1998, CVS acquired Arbor in an exchange of
stock that will be accounted for as a pooling of interests (the "Merger with
Arbor"). Arbor stockholders received for each Arbor share 0.3182 shares of
Common Stock. Arbor is the leading drugstore chain in southeastern Michigan
in terms of store count and sales volume. The Merger with Arbor strengthened
CVS' position as one of the nation's leading chain drugstore companies by
bringing CVS into a high-growth, contiguous geographic market where CVS
previously had no presence.
The Company's principal executive offices are located at One
CVS Drive, Woonsocket, Rhode Island 02895, telephone (401) 765-1500.
Growth Strategies
The Company focuses on a number of initiatives as part of its
strategy to achieve continued growth and build shareholder value. These
initiatives are directed toward driving top-line revenue growth, improving
operating efficiencies and achieving appropriate returns on capital deployed,
and include the following:
Aggressive Store Development
To support growth in its existing stores, the Company has in
place an active remodeling and remerchandising program, which seeks to remodel
20% of the Company's existing stores each year and to remerchandise another
20% each year. In addition, as described more fully below, the Company is
actively seeking to relocate many of its strip shopping center locations to
freestanding sites. During 1997, the Company opened 287 new stores, including
116 relocations of existing stores, and in 1998 following the Merger with
Arbor, expects to open approximately 320 new stores, including approximately
150 relocations. In addition, over the longer term, the Company expects to
open 150 to 200 new stores in the Michigan market. During 1997, the Company
also began the process of converting all retained Revco stores into the CVS
store format. The conversion process consists of three elements: converting
the Revco point-of-sale and pharmacy computer systems to CVS' systems,
revising the Revco planograms to reflect the CVS merchandise mix and
remodeling the Revco stores to the "look and feel" of a CVS store. Both the
conversion of Revco's systems and the re-planograms have been completed, with
the exception of cosmetics, which will occur as the Revco stores are
remodeled. Approximately 900 Revco stores had been remodeled into the CVS
"look and feel" as of March 1998 and the Company expects to complete the Revco
store remodeling project by the end of November 1998.
The addition of new stores has played, and will continue to
play, a major role in the Company's continued growth. As new stores have been
opened, the Company has maintained its objective of securing strong positions
in each market that its stores serve. This provides the Company several
important advantages, including an ability to save on advertising and
distribution costs. It is also an important consideration for managed care
providers, who want to provide their members with convenient access to
pharmacy services. Management anticipates that most of the planned store
openings in 1998 will be based on CVS' 10,125 square foot freestanding
prototype, which includes a drive-through pharmacy. New sites will be selected
based on convenience, with an emphasis on freestanding locations at traffic
controlled intersections.
Management expects that relocations of existing in-line strip
shopping center stores to freestanding locations will account for
approximately 50% of store openings over the next several years.
Historically, as a result of their more convenient locations and larger size,
relocated stores have historically realized significant improvement in
customer count and revenues, driven largely by increased sales of higher margin
front store merchandise. Management expects this trend to continue; however,
there can be no assurance that similar improvements will be achieved in each
geographic market in which the Company operates. See "Cautionary Statement
Regarding Forwarding Looking Statements" above. Freestanding locations require
properties of approximately 1 1/4 acres to support parking for 40-60 cars. As
a result, site selection is also an important aspect of the Company's
relocation program.
Finally, the Company believes that achieving a critical mass in
terms of store count and locating stores in desirable geographic markets is
essential to competing effectively in the context of the current managed care
environment described more fully below. As a result, management believes that
the Company's store development program is an important element of its ability
to maintain its leadership position in the chain drugstore industry.
Integrated Health Care Provider
In 1997, pharmacy sales increased 23.6% to $6.9 billion,
representing approximately 54% of total sales for the year, compared to
pharmacy sales of $5.6 billion in 1996, representing approximately 51% of total
sales for such year. In 1997, CVS pharmacies filled an average of
approximately 1,200 prescriptions per store per week, which was significantly
higher than the average community pharmacy. For the reasons described above,
the Company believes that its pharmacy operations will continue to represent a
critical part of its business and strategy. See "--General" above.
CVS believes that the growth of its pharmacy business will
continue to be driven by the shift toward managed care plans as a means of
controlling healthcare costs. During fiscal 1997, approximately 80% of the
Company's pharmacy sales were attributable to payments by third party
providers under prescription drug plans, as compared to approximately 76% in
1996. The growth in managed care has substantially increased the use of
prescription drugs as managed care providers have (i) made the costs of
prescription drugs more affordable to a greater number of people and (ii)
supported prescription drug therapy as an alternative to more expensive forms
of treatment, such as surgery. In a typical third party payment plan, the
Company has a contract with a third party payor, such as an insurance company,
a prescription benefit management company, a governmental agency, a private
employer, a health maintenance organization or other managed care provider,
which agrees to pay for all or a portion of a customer's eligible prescription
purchases in exchange for reduced prescription rates. Although third party
payment plans provide a high volume of prescription drug sales, such sales
typically generate lower gross margins than other prescription drug sales due
to the cost containment efforts of these large third party payors and the
increasing competition among pharmacies for this business. During 1997, the
top 5 third party providers accounted for approximately 36% of CVS' pharmacy
sales. Any significant loss of third party provider business could have a
material adverse affect on the Company's business and results of operations.
CVS' experience in providing solutions to managed care
providers, and its existing store base which affords easy access and
convenience to consumers, are factors that should contribute to the Company's
continued ability to attract and maintain third party business. In addition,
the Company's Rx2000 pharmacy computer system facilitates the management of
third party healthcare plans and enables CVS to provide managed care providers
with a level of information which the Company believes is unmatched by
competitors. By analyzing this data, CVS and its managed care partners are
able to evaluate treatment outcomes with an eye toward improving care and
containing costs. The Company's emphasis on customer service extends from the
expert advice and service that individual customers receive from CVS
pharmacists to the managed care portion of the Company's business, where
Managed Care Service Teams are responsible for ensuring the high level of
service that CVS' managed care partners receive.
The Company's pharmacy business also continues to benefit from
an "independent file buy" program, in which CVS purchases prescription files
from one or more independent pharmacies. During 1997, CVS purchased 190
prescription files, each containing an average weekly prescription count of
nearly 500, from independent pharmacies. The Company believes that
independent file buys are productive investments. In many cases, the
independent pharmacist will move to CVS, thereby providing continuity in the
pharmacist-patient relationship.
CVS is committed to being part of an integrated healthcare
approach that brings together industry participants such as physicians,
pharmaceutical companies, managed care providers and pharmacies in order to
provide patients with the best possible care at the lowest cost. The
Company's efforts to date have concentrated primarily on two main areas: (i)
the operation and expansion of PharmaCare, the Company's prescription benefit
management subsidiary, and (ii) the creation of strategic alliances with
healthcare partners.
PharmaCare was established in 1994 and offers managed care
providers a full range of prescription benefits management services, including
plan design and administration, formulary management, claims processing and
generic substitution, with a focus on providing integrated solutions to the
delivery of healthcare. PharmaCare has grown considerably and, at the end of
1997, provided managed healthcare services for approximately 5 million people
through a preferred national pharmacy network of approximately 40,000
pharmacies. In December 1997, PharmaCare merged with Revco's prescription
benefit management subsidiary, RxConnections, and assumed Revco's mail order
pharmacy operations, thereby strengthening and broadening PharmaCare's service
network.
One of the features that sets PharmaCare apart from other
prescription benefit management providers is its proprietary Clinical
Information Management System ("CIMS"). CIMS enables CVS pharmacists to work
more efficiently with physicians by facilitating communication and
information-sharing, with the objective of improving patient care and reducing
costs. Approximately 20,000 physicians are currently using CIMS, which began
with only 500 physicians in 1994. In addition, PharmaCare plays an increasing
role in healthcare management through integrated partnerships with several
large managed care providers.
CVS also pursues strategic alliances with healthcare partners
to develop products and services that create new opportunities for revenue and
profit growth. For example, CVS has entered into a joint venture called CVS
Health Connection, with Pfizer Health Solutions, Inc., a subsidiary of Pfizer,
Inc. Through this partnership, community health screening centers are
established in CVS store settings. The first CVS Health Connection center
opened in September 1997 in a New Bedford, Massachusetts CVS store. Harvard
Pilgrim Healthcare, one of the nation's largest and most progressive HMOs, has
contracted to offer health screening services to its members through this
center.
Effective Execution at Retail
The Company's front store merchandising strategies are designed
to improve customer satisfaction, selection and convenience, and establish CVS
stores as a destination for a growing number of front store merchandise
categories such as greeting cards, film and photo-finishing services, beauty
and cosmetics, seasonal merchandise, convenience foods and over-the-counter
drugs. CVS' 10,125 square-foot free-
standing prototype stores have helped enable the Company to improve store
layout, convenience and selection through the addition of product categories
and the enhancement of assortments within product categories. In addition,
over the past several years, the Company has made significant investments in
systems and technology to respond more effectively to customer needs, manage
inventory and control costs.
Through its point-of-sale scanning technology, CVS has
developed an advanced retail data base that has enabled the Company to adopt a
category management approach to front-end merchandising. Through category
management, CVS works in partnership with major suppliers to refine and tailor
assortments within product categories to the specific purchasing preferences
of customers within each market. Category management enables the Company to
analyze the impact of pricing, promotion and mix on a category's sales and
profitability and develop tactical merchandising plans for each category by
market.
The Company believes that effective category management
increases customer satisfaction and that its category management approach has
been a primary factor in its front store comparable sales gains and improved
gross margins. In addition, the Company believes that its ability to satisfy
customers through category management will be enhanced through its
implementation of supply chain management. Supply chain management is
designed to more effectively link CVS' stores and distribution centers with
suppliers to speed the delivery of merchandise to CVS stores in a manner that
both reduces out-of-stock positions and lowers CVS' investment in inventory.
The Company expects to see tangible benefits of its supply chain management
project beginning in 1998.
CVS strives to provide the highest levels of service to its
customers and partners. As a result, the Company devotes considerable time
and attention to people, systems and high service standards. The Company
places an emphasis on attracting and training friendly and helpful associates
to work both in CVS stores and throughout the CVS organization. Each CVS
store receives a formal customer service evaluation twice per year, based on a
mystery shopper program, customer letters and calls and market research. The
priority that CVS places on customer service extends into the managed care
portion of its business as well. In every market, a Managed Care Service Team
is responsible for ensuring that managed care partners are receiving high
levels of service. CVS pharmacists consistently rank at the top of the
industry on measurements of trust, relationship-building and accessibility.
This high level of service and expertise has played a key role in enabling the
growth of CVS' pharmacy operations.
Expected Benefits of the Mergers
The chain drugstore industry has recently undergone rapid
consolidation. In this environment, CVS management believes that achieving a
critical mass of stores in appropriate geographic markets is essential to
competing effectively in the chain drugstore industry as well as with
alternative distribution channels.
Revco. The integration of Revco has proceeded according to
management's expectations. CVS achieved the anticipated costs savings of $40
million in 1997 and management believes it is on track to achieve annual cost
savings of $100 million, beginning in 1998. See "Cautionary Statement
Regarding Forward-Looking Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Revco Integration
Update".
Arbor. The Merger with Arbor presented an opportunity to
acquire a high-quality company in an industry where there is a diminishing
number of suitable acquisition candidates.
Importantly, the Merger with Arbor met each of CVS' three
criteria for strategic acquisitions: (i) acquisitions should be accretive to
earnings before one-time merger-related charges; (ii) acquisitions should
enable CVS to achieve a leadership position in new markets; and (iii) there
should exist upside potential to improve the operations and profitability of
an acquired business.
CVS expects that the Merger with Arbor will be accretive to
earnings (before one-time merger-related charges) in the first full year of
combined operations. CVS expects to achieve cost savings from the combined
operations of about $30 million annually, principally through the closing of
Arbor's headquarters, the achievement of economies of scale in advertising,
distribution and other operational areas, and the spreading of its investments
in information technology over a broader store base. See "Cautionary Statement
Regarding Forward-Looking Statements".
The Merger with Arbor also provided CVS with a leading presence
in the Detroit metropolitan area, the nation's fourth largest drug retail
market, where CVS previously had no presence and is expected to help position
the Company to sustain long-term growth.
CVS management also believes that upside potential exists in
the ability for each organization to learn from applying the strengths of the
other. For example, CVS believes that CVS' expertise in cosmetics and the
depth of CVS' private label can be applied to Arbor stores, and that Arbor's
expertise in photo-finishing and in seasonal and general merchandise can be
applied to CVS stores.
Both CVS and Arbor have similar business philosophies focusing
on high-quality real estate, strong personnel and taking care of the customer.
Management believes that the compatibility between the parties in
philosophies, culture, store size and format and merchandise strategy should
facilitate a relatively smooth integration of the companies.
RECENT DEVELOPMENTS
On May 13, 1998, the Board of Directors of CVS declared a
two-for-one stock split (the "Stock Split") of the Common Stock distributable
on June 15, 1998 to its stockholders of record on May 25, 1998. The Board of
Directors also increased the dividend rate on the Common Stock after the Stock
Split. In that regard, the Board declared a quarterly cash dividend of
$0.0575 per share, payable on August 1, 1998 to stockholders of record on July
23, 1998 ($0.23 per share on an annual post-split basis).
USE OF PROCEEDS
CVS will not receive any proceeds from the sale of the
Automatic Common Exchange Securities. All of the shares of Common Stock to be
delivered upon exchange of the Automatic Common Exchange Securities are
beneficially owned by the Selling Stockholder.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the NYSE under the symbol "CVS".
The table below sets forth, for the calendar quarters indicated, the reported
high and low sale prices of the Common Stock as reported on the NYSE Composite
Transaction Tape and the cash dividends declared by the Company per share of
Common Stock. In October 1996, the Company distributed 100% of the common
stock of Footstar, Inc. ("Footstar"), formerly a wholly owned subsidiary of
CVS, in the form of a stock dividend, to its stockholders. The stock prices
shown in the table are actual trading prices and do not reflect adjustments
for the when-issued price of Footstar prior to October 16, 1996 (the date on
which Footstar common stock commenced trading regular way on the NYSE). See
"Recent Developments".
<TABLE>
<CAPTION>
Market Price Cash
------------------------- Dividends
High Low Declared
--------- ---------- ---------
<S> <C> <C> <C>
1996
First Quarter..................................... $36 3/8 $27 1/4 $0.11
Second Quarter.................................... 44 1/2 35 1/4 0.11
Third Quarter..................................... 46 36 5/8 0.11
Fourth Quarter.................................... 44 3/4 36 3/8 0.11
1997
First Quarter..................................... $48 $39 $0.11
Second Quarter.................................... 53 3/4 44 1/4 0.11
Third Quarter................................. 60 50 7/8 0.11
Fourth Quarter................................ 70 54 5/8 0.11
1998
First Quarter................................. 77 13/16 60 7/8 $0.11
Second Quarter (through May 13, 1998)......... 80 66 1/8 0.11
</TABLE>
On May 13, 1998, the last reported sale price of the Common
Stock was $68 7/8. As of March 28, 1998, there were approximately 9,900
holders of record of the Common Stock.
DIVIDEND POLICY
Future dividends on the Common Stock will depend upon the
Company's results of operations, financial condition, capital expenditure
program and other factors, some of which are beyond the Company's control.
The Company's Board of Directors recently increased the dividend rate on the
Common Stock. There can be no assurance, however, as to whether or when the
Company's Board of Directors will again change the current policy regarding
dividends. See "Recent Developments" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
(In millions, except per share amounts and operating data)
The following table sets forth selected consolidated financial
and operating data for CVS and its subsidiaries. The audited consolidated
financial statements of the Company for the three years ended December 31,
1997 have been audited by KPMG Peat Marwick LLP ("KPMG"), independent public
accountants, whose audit report is also incorporated herein by reference. The
selected unaudited data presented below for the three months ended March 28,
1998 and March 29, 1997, and as of March 28, 1998, are derived from the
unaudited consolidated condensed financial statements of the Company, to which
KPMG Peat Marwick LLP has reported that it has applied limited procedures in
accordance with professional standards for a review of such information. The
unaudited consolidated condensed financial statements as of March 28, 1998,
and for the three months ended March 28, 1998 and March 29, 1997, and the
review report thereon, are incorporated by reference in this Prospectus. The
selected historical consolidated financial and operating data should be read
in conjunction with the consolidated financial statements and related notes
thereto incorporated herein by reference to the Company Form 10-K and the
consolidated condensed financial statements and notes thereto incorporated
herein by reference to the Company Form 10-Q and are not necessarily
indicative of future results. The following selected historical consolidated
financial and operating data does not reflect the Merger with Arbor.
<TABLE>
<CAPTION>
Fiscal Year ended December 31, Three Months ended
------------------------------------------------- ----------------------------
March 29, March 28,
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Results of Operations:
Net sales........................ $9,763.4 $10,944.8 $12,738.2 $3,160.8 $3,333.6
Gross margin..................... 2,746.9 3,052.1 3,439.7 900.1 931.8
Comparable gross margin(1)....... 2,746.9 3,052.1 3,514.7 900.1 931.8
Operating profit................. 230.7 540.8 199.8 161.1 221.6
Comparable operating
profit(2)(4)................... 445.7 553.6 717.5 192.1 221.6
Earnings from continuing
operations before
extraordinary item............. 57.8 340.8 37.3 82.6 121.3
Comparable earnings from
continuing operations
before extraordinary
item(3)(4)..................... 184.7 275.2 380.1 101.7 121.3
Net earnings (loss).............. (572.8) 176.6 37.7 82.7 121.3
Net earnings (loss) available
to common shareholders......... (589.8) 162.1 24.0 79.2 117.9
Dividends declared............... 184.3 68.6 82.2 11.7 19.4
Per Common Share:
Earnings from continuing
operations before
extraordinary item:
Basic....................... $0.25 $1.97 $0.14 $0.48 $0.68
Diluted..................... 0.25 1.92 0.14 0.47 0.67
Comparable earnings from
continuing operations
before extraordinary
item:(3)(4)
Basic....................... 1.02 1.58 2.16 0.59 0.68
Diluted..................... 1.02 1.55 2.12 0.58 0.67
Net earnings (loss):
Basic....................... (3.60) 0.98 0.14 0.48 0.68
Diluted..................... (3.59) 0.98 0.14 0.47 0.67
Dividends........................ 1.52 0.44 0.44 0.11 0.11
Percentage of Net Sales:
Gross margin..................... 28.1% 27.9% 27.0% 28.5% 28.0%
Comparable gross margin(1)....... 28.1 27.9 27.6 28.5 28.0
Operating profit................. 2.4 4.9 1.6 5.1 6.6
Comparable operating
profit(2)(4)................... 4.6 5.1 5.6 6.1 6.6
Earnings from continuing
operations before
extraordinary item............. 0.6 3.1 0.3 2.6 3.6
Comparable earnings from
continuing operations
before extraordinary
item(3)(4)..................... 1.9 2.5 3.0 3.2 3.6
Net earnings (loss).............. (5.9) 1.6 0.3 2.6 3.6
Balance Sheet Data:
Net working capital.............. $1,317.7 $1,406.1 $830.0 $1,525.8 $930.8
Total assets..................... 6,335.6 5,693.7 5,636.9 5,632.4 5,794.6
Total long-term debt............. 1,027.6 1,184.3 272.6 1,177.5 272.6
Total shareholders' equity....... 2,392.8 2,196.4 2,361.4 2,291.2 2,480.1
Operating Data:
Number of stores (at last period
end).......................... 3,520 4,014 3,888 4,008 3,856
Same store sales increase(5).... 8.8% 8.7% 9.8% 13.1% 7.3%
Pharmacy same store sales
increase(4)....................... 13.9% 13.3% 16.7% 18.4% 14.4%
</TABLE>
- ----------
(1) Comparable gross margin excludes the pre-tax effect of the $75.0 million
($49.9 million after-tax) non-recurring charge in fiscal 1997 related to the
markdown of non-compatible Revco merchandise (the "Revco Inventory
Markdown").
(2) Comparable operating profit excludes the pre-tax effect of the following
non-recurring charges: (i) in fiscal 1997, the $411.7 million ($273.7
million after-tax) CVS/Revco Restructuring Charge (as defined below) related
to the merger with Revco, the Revco Inventory Markdown discussed in Note (1)
above, and $31.0 million ($19.1 million after-tax) related to the
restructuring of Big B, Inc. (the "Big B Restructuring Charge"), (ii) in
fiscal 1996, $12.8 million ($6.5 million after-tax) related to the failed
merger of Rite Aid Corporation and Revco and (iii) in fiscal 1995, $165.5
million ($97.7 million after-tax) related to the CVS Strategic Restructuring
Program and the early adoption of Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and $49.5 million ($29.1
million after-tax) related to the Company changing its policy from
capitalizing internally developed software cost to expensing the costs as
incurred, outsourcing certain technology functions and retaining certain
employees until their respective job functions were transitioned. See
"--Management's Discussion and Analysis of Financial Condition and Results
of Operations".
(3) Comparable earnings from continuing operations before extraordinary item and
comparable earnings per common share from continuing operations before
extraordinary item exclude the after-tax effect of the charges discussed in
Note (1) and Note (2) above and the $121.4 million ($72.1 million after-tax)
gain on sale of securities in fiscal 1996.
(4) For the three months ended March 29, 1997, comparable operating profit
excludes the pre-tax effect of the Big B Restructuring Charge discussed in
Note 2 above and comparable earnings from continuing operations before
extraordinary item and comparable earnings per common share from continuing
operations before extraordinary item exclude the after-tax effect of the Big
B Restructuring Charge.
(5) Same store sales data is calculated based on the change in sales commencing
after a new store has been opened twelve months. The first twelve months a
store is open are not included in the same store calculation. Relocations
are included in same store sales. The increase in same store sales for 1995
excludes the impact of Revco sales.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except where otherwise specified, the following discussion
reflects the Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company Form 10-K and the Company Form
10-Q. As a result, the following discussion does not reflect the results of
operations of Arbor except as otherwise specified herein. In addition, all
references to the Notes to the consolidated financial statements refer to the
Company's consolidated financial statements and related notes thereto
incorporated herein by reference to the Company Form 10-K and the consolidated
condensed financial statements and notes thereto incorporated herein by
reference to the Company 10-Q.
Merger with Arbor
The Merger with Arbor established CVS as the nation's top chain
drug retailer based on store count and prescriptions dispensed. The combined
company is expected to have revenues of approximately $15 billion in 1998 and
approximately 4,100 stores in 25 states and the District of Columbia, and is
expected to dispense approximately 12% of the retail prescriptions in the
United States. CVS acquired Arbor in an exchange of stock that will be
accounted for as a pooling of interests transaction, tax free to Arbor
shareholders. See "The Company--General".
In the second quarter of 1998, the Company expects to record a
non-recurring after-tax charge of approximately $114.0 million in connection
with the Merger with Arbor.
Merger with Revco
On May 29, 1997, CVS completed a merger with Revco, 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. Each outstanding
share of Revco common stock was exchanged for 0.8842 of a share 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.
Subsequent to the merger with Revco, and pursuant to a consent
decree with the Federal Trade Commission entered into in connection with the
merger with Revco, the Company divested 120 Revco stores, primarily in the
Richmond and Tidewater area of Virginia.
Accounting Treatment For the Merger with Revco
The merger with Revco, 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.
Prior to the merger with Revco, 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 reflect a December 31 year-end, to conform
with CVS' fiscal year-end.
Revco's cost of sales and inventories have been restated from
the last-in, first-out method to the first-in, first-out method in order to
conform to CVS' accounting method for inventories. The impact of the
restatement was to increase earnings from continuing operations by $13.5
million in 1996 and $11.9 million in 1995.
There were no material transactions between CVS and Revco prior
to the merger with Revco. Certain reclassifications have been made to Revco's
historical consolidated financial statements to conform to CVS' presentation.
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
activities (the "CVS/Revco Restructuring Charge").
Following is a summary of the significant components of the
CVS/Revco Restructuring Charge:
<TABLE>
<CAPTION>
CVS/Revco
Restructuring Utilized Balance at
Charge in 1997 12/31/97
------ ------- --------
(in millions)
<S> <C> <C> <C>
Merger transaction costs. $ 35.0 $ 32.1 $ 2.9
Restructuring costs:
Employee severance.... 89.8 37.4 52.4
Exit costs............ 286.9 126.1 160.8
------ ------ ------
$411.7 $195.6 $216.1
====== ====== ======
</TABLE>
Merger transaction costs related to the merger with Revco
primarily include fees for investment bankers, attorneys, accountants,
financial printers and other related charges. Restructuring activities
primarily relate to the consolidation of administrative functions. These
actions resulted 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 certain facilities 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 of which $164.8 million had been incurred as of December 31, 1997.
The remaining balance, $193.2 million, which primarily includes
non-cancellable operating lease commitments and severance, is expected to be
incurred in 1998 and beyond.
The Company also recorded a $75 million charge to cost of goods
sold in the second quarter of 1997 to reflect markdowns on non-compatible
Revco merchandise.
See Note 1 to the consolidated financial statements for further
information about the merger with Revco.
Revco Integration Update
CVS is pleased to report that the integration of Revco is
proceeding according to expectations. Specifically:
o CVS has completed the conversion of all of Revco's back-end systems to
CVS' back-end systems, enabling all merchandising and purchasing
decisions to be made from CVS' headquarters.
o CVS has completed the conversion of all of Revco's store systems, both
point-of-sale and pharmacy, to CVS' store systems.
o CVS has remodeled approximately 700 Revco stores to "look and feel" like
a CVS store. The Company expects to have the remaining Revco stores
remodeled before the end of 1998.
o With the exception of cosmetics, CVS has converted the inventory in all
Revco stores to the CVS merchandise mix. The Company expects to
complete the conversion of cosmetics in the remodeled Revco stores
during the first half of 1998, following the receipt of tailored
cosmetics fixtures from vendors. The Company expects to complete the
remaining Revco stores as they are remodeled during 1998.
o The former Revco headquarters in Twinsburg, Ohio has been closed.
o CVS achieved the anticipated costs savings of $40 million in 1997 and
believes it is on track to achieve annual cost savings of $100 million,
beginning in 1998. The achievement of future costs savings is subject
to the uncertainties discussed in the "Cautionary Statement Regarding
Forward Looking Statements" section above.
Acquisition of Big B, Inc.
In November 1996, the Company completed a cash tender offer
(the "Offer") for the common stock of Big B, Inc. ("Big B") resulting in the
Company owning approximately 85% of Big B's common stock. In December 1996,
the Company completed a second step acquisition in which all of the remaining
Big B common stock was acquired at 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
business combination 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 ("Goodwill") of approximately $249 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.
See Note 5 to the consolidated financial statements for further
information about the Big B acquisition.
CVS Strategic Restructuring Program
In November 1997, the Company completed the final phase of its
comprehensive strategic restructuring plan (the "CVS Strategic Restructuring
Program"), first announced in October 1995 and subsequently refined in May
1996 and June 1997. The restructuring plan included, among other things:
o The sale of four operating businesses (completed during 1995 and 1996).
o The spin-off of Footstar, Inc. ("Footstar") (completed in October 1996).
o The initial public offering of 67.5% of the shares of common stock of
Linens 'n Things, Inc. (completed in December 1996).
o The sale of Bob's Stores (completed in November 1997).
o The elimination of certain corporate overhead costs (completed during
1995 and 1996).
In June 1997, the Company sold its remaining 32.5% ownership
interest in Linens 'n Things, Inc.
The CVS Strategic Restructuring Program was completed without
significant changes to the plan approved by the Board of Directors. As part
of completing this program, the Company recorded, as a component of
discontinued operations, a pre-tax charge of approximately $35 million during
the second quarter of 1997 to finalize certain liabilities accrued for in the
1996 Restructuring Charge (as defined below).
See Note 3 to the consolidated financial statements for further
information about the CVS Strategic Restructuring Program.
Results of Operations
The following discussion should be read in conjunction with the
Company's consolidated financial statements as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997
which are incorporated herein by reference to the Company Form 10-K and the
consolidated condensed financial statements and notes thereto incorporated
herein by reference to the Company Form 10-Q.
As discussed above, the merger with Revco has been accounted
for as a pooling of interests under APB Opinion No. 16. 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.
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. See " --CVS Strategic Restructuring
Program" above and Note 3 to the consolidated financial statements for further
information. The following discussion, therefore, focuses primarily on
continuing operations.
Three Months Ended March 28, 1998 versus Three Months Ended March 29, 1997
Net sales for the first quarter of 1998 increased $172.8
million or 5.5% to $3.3 billion, compared to net sales of $3.2 billion in the
first quarter of 1997. Same store sales, consisting of sales from stores that
have been open for more than one year, rose 7.3%, with pharmacy same store
sales increasing 14.4%. Pharmacy sales were 57% of total sales in the first
quarter of 1998, compared to 54% of total sales in the first quarter of 1997.
Third party prescription sales were 82% of pharmacy sales in the first quarter
of 1998, compared to 79% of pharmacy sales in the first quarter of 1997. Such
increases in net sales and same store sales for the first quarter of 1998
occurred despite the negative impact of the shift in the Easter selling season
from the first quarter in 1997 to the second quarter in 1998. In addition,
net sales were further negatively impacted by a reduction in total store count
from 4,008 at March 29, 1997 to 3,856 at March 28, 1998 which resulted
primarily from the divestiture of 120 stores pursuant to a consent decree with
the Federal Trade Commission entered into in connection with the merger of CVS
and Revco.
Gross margin for the first quarter of 1998 increased $31.7
million or 3.5% to $931.8 million, compared to $900.1 million in the first
quarter of 1997. Gross margin as a percentage of net sales for the first
quarter of 1998 was 28.0%, compared to 28.5% of net sales in the first quarter
of 1997. The decline in gross margin as a percentage of sales in 1998 was
primarily due to the continued increase in lower gross margin third party
prescription sales and the increase in pharmacy sales as a percentage of total
sales.
In recent years, the Company has experienced a reduction in
pharmacy gross margin due to the efforts of managed care organizations and
other third party payors to reduce prescription drug costs. To address this
trend, in certain circumstances, the Company has declined to participate in
certain third party programs that failed to satisfy minimum profitability
standards. In the event this trend continues and the Company decides to
decline participation in additional third party programs and/or terminate
programs that fall below minimum profitability standards, the Company may be
unable to sustain its current rate of sales growth.
Total operating expenses for the first quarter of 1998 were
$710.2 million or 21.3% of net sales, compared to $739.0 million or 23.4% of
net sales in the first quarter of 1997. Excluding the $31.0 million charge
recorded during the first quarter of 1997 for certain non-capitalizable costs
associated with the restructuring of Big B Inc. (the "Big B Restructuring
Charge"), comparable operating expenses were $708.0 million or 22.4% of net
sales in the first quarter of 1997. The 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 consolidation of CVS' and Revco's administrative
functions, (iii) store operating improvements and (iv) key technology
investments such as the Company's Rx2000 Pharmacy System, CVS Rapid Refill
System, Pharmacy Data Warehouse, Point-of-Sale-System, Retail Data Warehouse
and Field Management System.
Operating profit for the first quarter of 1998 increased $60.5
million to $221.6 million, compared to $161.1 million in the first quarter of
1997. Excluding the Big B Restructuring Charge in 1997, comparable operating
profit was $192.1 million, in the first quarter of 1997. Comparable operating
profit as a percentage of net sales was 6.6% in the first quarter of 1998,
compared to 6.1% in the first quarter of 1997.
Interest expense, net for the first quarter of 1998 decreased
$1.6 million to $11.3 million, compared to $12.9 million in the first quarter
of 1997. Interest expense for the first quarter of 1998 decreased $6.4 million
to $12.7 million, compared to $19.1 million in the first quarter of 1997,
primarily due to reduced borrowing levels and lower weighted average borrowing
rates. Interest income for the first quarter of 1998 decreased $4.8 million
to $1.4 million, compared to $6.2 million in the first quarter of 1997.
Interest income in the first quarter of 1997 included interest realized on
notes receivable that were received as a portion of the proceeds from the sale
of certain operating businesses. These notes were sold during 1997.
Net earnings for the first quarter of 1998 increased $38.6
million to $121.3 million for $0.67 per diluted share, compared to $82.7
million or $0.47 per diluted share in the first quarter of 1997. Excluding
the Big B Restructuring Charge in 1997, comparable net earnings were $101.8
million or $0.58 per diluted share in the first quarter of 1997.
1997 versus 1996
Net sales for 1997 increased $1.8 billion or 16.4% to $12.7
billion, compared to $10.9 billion in 1996. Same store sales rose 9.8%, with
pharmacy same store sales increasing 16.7%. Pharmacy sales were 54% of total
sales in 1997, compared to 51% of total sales in 1996.
The growth in front store sales was primarily driven by
increases in categories such as greeting cards, film and photofinishing,
beauty and cosmetics, convenience foods, private label and seasonal
merchandise. Growth in pharmacy sales was driven primarily 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 responsibility being borne by Americans for their
healthcare, an increasing demand for retail formats that provide easy access
and convenience, discovery of new and better drug therapies, and the need for
cost effective healthcare solutions (collectively, the "Pharmacy Sales
Factors"). Both front store and pharmacy sales were positively impacted by the
Big B acquisition effective November 16, 1996. Excluding the positive impact
of the Big B acquisition, net sales increased 11.1% in 1997, compared to 1996.
Gross margin for 1997 increased $387.6 million or 12.7% to $3.4
billion, compared to $3.1 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 $462.6 million or 15.2% to $3.5 billion.
Gross margin as a percentage of net sales for 1997 was 27.0%,
compared to 27.9% of net sales in 1996. Excluding the effect of the Revco
Inventory Markdown, gross margin as a percentage of net sales was 27.6% for
1997. The decline in comparable gross margin as a percentage of net sales was
primarily due to the continued increase in lower gross margin third party
prescription sales and the increase in pharmacy sales as a percentage of total
sales (collectively, the "Pharmacy Gross Margin Factors").
In recent years, the Company has experienced a reduction in
pharmacy gross margin due to the efforts of managed care organizations and
other third party payors to reduce prescription drug costs. To address this
trend, in certain circumstances, the Company has declined to participate in
certain third party programs that failed to satisfy minimum profitability
standards. In the event this trend continues and the Company decides to
decline participation in additional third party programs and/or terminate
programs that fall below minimum profitability standards, the Company may be
unable to sustain its current rate of sales growth.
Total operating expenses for 1997 were $3.2 billion or 25.4% of
net sales, compared to $2.5 billion or 22.9% of net sales 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:
o During the second quarter of 1997, the Company recorded the CVS/Revco
Restructuring Charge. For further information about this charge, see
"--Accounting Treatment For the Merger with Revco" above.
o During the first quarter of 1997, the Company recorded the $31.0 million
Big B Restructuring Charge. The significant components of this charge
included: $5.3 million for store, distribution and system conversion
costs, $18.7 million for store closing costs and $7.0 million for
duplicate headquarters and administration costs. In accordance with
EITF Issue No. 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.
o 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 CVS/Revco Restructuring Charge and the Big B
Restructuring Charge in 1997 and the Rite Aid Charge in 1996, comparable
operating expenses for 1997 were $2.8 billion or 22.0% of net sales, compared
to $2.5 billion or 22.8% of net sales in 1996. The improvement in comparable
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 Rx2000 Pharmacy System, CVS Rapid Refill System, Pharmacy Data
Warehouse, Point-of-Sale System, Retail Data Warehouse and Field Management
System.
Operating profit for 1997 decreased $341.0 million to $199.8
million, compared to $540.8 million in 1996. Excluding the effect of the Revco
Inventory Markdown, the CVS/Revco Restructuring Charge and the Big B
Restructuring Charge in 1997 and the Rite Aid Charge in 1996 (collectively,
the "Noted Charges"), comparable operating profit increased $163.9 million or
29.6% to $717.5 million in 1997, compared to $553.6 million in 1996.
Comparable operating profit as a percentage of net sales was 5.6% for 1997,
compared to 5.1% of net sales in 1996.
Other (expense) income, net for 1997 amounted to an expense of
$44.8 million, compared to income of $51.3 in 1996. The decrease in 1997 was
primarily due to the $121.4 million gain that was realized during 1996 upon
the sale of certain equity securities that were received as part of the
proceeds from the sale of Marshalls to The TJX Companies, Inc. (the "TJX
Gain"). The effect of the TJX Gain in 1996 was offset, in part, by a $30.9
million decrease in net interest expense in 1997. The decrease in net
interest expense was primarily due to the lower average borrowing levels that
resulted primarily from the Revco Debt Retirement. For further discussion,
see "--Revco Debt Retirement" below.
Earnings from continuing operations before extraordinary item
for 1997 decreased $303.5 million to $37.3 million or $0.14 per diluted share,
compared to $340.8 million or $1.92 per diluted share in 1996. Excluding the
effect of the Noted Charges and the TJX Gain, comparable earnings from
continuing operations before extraordinary item increased $104.8 million or
38.1% to $380.1 million, or $2.12 per diluted share in 1997, compared to
$275.2 million, or $1.55 per diluted share in 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 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 as part of the CVS Strategic
Restructuring Program. During the second quarter of 1996, the Company recorded,
as a component of discontinued operations, a pre-tax charge of $235.0 million
(the "1996 Restructuring Charge") after receiving approval from its Board of
Directors to implement (i) a formal plan to separate Linens 'n Things, Inc. and
Bob's Stores from the Company and (ii) a formal plan to convert 80 - 100 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. See
"--CVS Strategic Restructuring Program" above and Note 3 to the consolidated
financial statements for further information about the CVS Strategic
Restructuring Program.
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 "--Revco Debt
Retirement" below.
Net earnings for 1997 were $37.7 million, or $0.14 per diluted
share, compared to $176.6 million or $0.98 per diluted share, in 1996.
1996 versus 1995
Net sales for 1996 increased $1.2 billion or 12.1% to $10.9
billion, compared to $9.8 billion in 1995. Same store sales rose 8.7%, with
pharmacy same store sales increasing 13.3%. Pharmacy sales were 51% of total
sales in 1996 and 1995.
The growth in front store sales was primarily driven by
increases in categories such as greeting cards, film and photo-finishing,
beauty and cosmetics, convenience foods, private label and seasonal
merchandise. Growth in pharmacy sales was primarily driven by the Pharmacy
Sales Factors defined in "--1997 versus 1996" above.
Gross margin for 1996 increased $305.2 million or 11.1% to $3.1
billion, compared to $2.7 billion in 1995.
Gross margin as a percentage of net sales for 1996 was 27.9%,
compared to 28.1% of net sales in 1995. The decline in 1996 was primarily due
to the Pharmacy Gross Margin Factors defined in "--1997 versus 1996" above.
Total operating expenses for 1996 were $2.5 billion or 22.9% of
net sales, compared to $2.5 billion or 25.8% of net sales in 1995. In order
to properly evaluate the Company's total operating expenses in these periods,
it is important to note the following non-recurring charges:
o During the second quarter of 1996, the Company recorded the $12.8
million Rite Aid Charge.
o During the fourth quarter of 1995, the Company recorded a pre-tax charge
of $872.0 million when its Board of Directors approved the CVS Strategic
Restructuring Program (the "1995 Restructuring Charge"). $160.6 million
of this charge pertained to 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 the Company's corporate headquarters in
Rye, New York. These costs primarily include asset write-offs, closed
store and warehouse lease liabilities and employee severance. The
balance of the charge, $711.4 million, was reflected as a component of
discontinued operations. See "--CVS Strategic Restructuring Program"
above and Note 3 to the consolidated financial statements for further
information about the CVS Strategic Restructuring Program.
o 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 (the "Accounting
Change"), $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. See "--Accounting Changes" below and
Note 2 to the consolidated financial statements for further information
about this charge.
o During the fourth quarter of 1995, the Company recorded, as a component
of operating expenses, the following non-recurring charges: (i) $11.6
million related to outsourcing certain technology functions and
retaining certain employees until their respective job functions were
transitioned, and (ii) $5.0 million related to the write-down of certain
fixed and intangible assets as a result of the Company's early adoption
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" (collectively, the "Special
Charges"). See "--Accounting Changes" below and Note 2 to the
consolidated financial statements for further information about these
charges.
Excluding the Rite Aid Charge in 1996 and the 1995
Restructuring Charge, the Accounting Change and the Special Charges in 1995,
comparable operating expenses for 1996 were $2.5 billion or 22.8% of net
sales, compared to $2.3 billion or 23.6% of net sales in 1995. The
improvement in comparable 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) store operating improvements and
(iv) key technology investments.
Operating profit for 1996 increased $310.1 million to $540.8
million, compared to $230.7 million in 1995. Excluding the Rite Aid Charge in
1996 and the 1995 Restructuring Charge, the Accounting Change and the Special
Charges in 1995, comparable operating profit increased $107.9 million or 24.2%
to $553.6 million in 1996, compared to $445.7 million in 1995. Comparable
operating profit as a percentage of net sales was 5.1% for 1996, compared to
4.6% of net sales in 1995.
Other (expense) income, net for 1996 amounted to income of
$51.3 million, compared to an expense of $114.5 million in 1995. This
increase was primarily due to the TJX Gain in 1996. In addition, net interest
expense decreased $38.8 million in 1996 to $75.7 million, compared to $114.5
million in 1995. The decrease in net interest expense was primarily due to
lower average borrowing levels.
Earnings from continuing operations for 1996 increased $283.0
million to $340.8 million, compared to $57.8 million in 1995. Excluding the
Rite Aid Charge and the TJX Gain in 1996 and the 1995 Restructuring Charge,
the Accounting Change and the Special Charges in 1995, comparable earnings
from continuing operations increased $90.5 million or 49.0% to $275.2 million,
or $1.55 per diluted share in 1996, compared to $184.7 million, or $1.02 per
diluted share in 1995.
Discontinued operations. During the second quarter of 1996, the
Company recorded the 1996 Restructuring Charge. During the fourth quarter of
1995, the Company recorded the 1995 Restructuring Charge. See "--CVS
Strategic Restructuring Program" above and Note 3 to the consolidated financial
statements for further information.
Net earnings for 1996 were $176.6 million or $0.98 per diluted
share, compared to a net loss of $572.8 million or $3.59 per diluted share in
1995.
Seasonality
The Company's business normally generates higher revenue during
the holiday season in its fourth quarter. In each of the fiscal years ended
December 31, 1997, 1996 and 1995, the fourth quarter accounted for
approximately 26%, 28% and 28% of the Company's net sales, respectively.
Liquidity & Capital Resources
The following discussion should be read in conjunction with the
Company's consolidated financial statements as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997 and the
Company's unaudited consolidated condensed financial statements as of March 28,
1998 and for the three months ended March 28, 1998 and March 29, 1997.
For the three months ended March 28, 1998, cash and cash
equivalents decreased $56.3 million to $112.2 million. The decrease in 1998
was primarily attributable to the following:
Net cash used in operating activities increased $74.0 million
to $120.3 million during the first quarter of 1998, compared to $46.3 million
during the first quarter of 1997. The increase in 1998 was primarily due to
an increase in inventory and to cash outlays associated with the integration
of Revco. The increase in inventory was primarily the result of: (i)
improving the in-stock position of every day merchandise in the converted
Revco stores prior to initiating promotional name change events and (ii)
increasing inventory levels in the Company's distribution centers to: (a)
ensure that stores are properly serviced during upcoming realignment periods
and (b) enable the Company to reduce the level of lower gross margin product
being purchased from pharmacy wholesales rather than directly from
manufacturers. The Company believes that its current inventory level should
be reduced and intends to do so by the end of 1998 without incurring
significant markdowns. The Company intends to finance the temporary increase
in inventory with short-term borrowings and, as a result, expects to incur
additional interest expense. The Company believes, however, that the
additional interest expense will be offset by improved operating performance.
Net cash used in investing activities increased $17.5 million
to $67.0 million during the first quarter of 1998, compared to $49.5 million
in the first quarter of 1997. The increase was primarily due to higher
capital expenditures offset, in part, by the proceeds received from the sale
of assets during the first quarter of 1998. During the first quarter of 1998,
the Company opened 63 stores (including 36 relocations) and closed 59 stores.
During 1998, after giving effect to the Merger with Arbor the
Company expects to open approximately 320 stores, about half of which will be
relocations. As of March 28, 1998, the Company operated 3,856 stores in 24
states and the District of Columbia. As of March 31, 1998, after giving
effect to the Merger with Arbor, the Company operated 4,064 stores in 25
states and the District of Columbia.
Net cash provided by financing activities increased $157.3
million to $131.0 million, compared to net cash used in financing activities
of $26.3 million in the prior year period. The increase in 1998 was primarily
due to the increase in short-term borrowings that resulted primarily from the
increase in inventory discussed above, offset, in part, by a reduction in
long-term debt. On January 15, 1998, the Company redeemed the remaining $19.2
million aggregate principal amount of it 9.125% Senior Notes at 103% of
principal plus accrued interest.
Reduction of Debt Levels
The Company's financial condition remained strong at the end of
1997. Management's aggressive focus on working capital combined with the
proceeds received from: (i) the sale of the Company's 32.5% ownership interest
in Linens 'n Things, Inc., (ii) the sale of Bob's Stores, (iii) the sale of
certain Revco stores, and (iv) the sale of certain notes receivable that were
received as a portion of the proceeds from the sale of certain businesses,
allowed the Company to reduce its total debt position by approximately $422.4
million during the year to $779.8 million at December 31, 1997.
Revco Debt Retirement
Following the completion of the merger with Revco:
o On May 30, 1997, the Company repaid $600 million of bank debt
outstanding under Revco's revolving credit facility.
o On June 30, 1997, the Company redeemed all $144.9 million aggregate
principal amount of the Revco 10.125% Senior Notes at 105% of the
principal amount plus accrued interest.
o In July 1997, the Company completed a tender offer pursuant to which it
repurchased $120.8 million of the $140.0 million aggregate principal
amount of the Revco 9.125% Senior Notes at an average price of 104.61%
of the principal amount plus accrued interest.
As a result of above (collectively, the "Revco Debt Retirement"),
the Company recorded an after tax-charge of $17.1 million during 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 statements of operations.
The Revco Debt Retirement was financed with cash on hand and
borrowings under the Company's commercial paper program. See Note 7 to the
consolidated financial statements for further information about the Revco Debt
Retirement.
Goodwill
In connection with certain acquisitions which were accounted for
as purchase business combinations under APB Opinion No. 16, the Company recorded
goodwill in the amount of $776.9 million, representing the excess of the cost of
the net assets acquired over their fair value. Goodwill is being amortized on a
straight-line basis generally over periods of 40 years. At December 31, 1997,
the unamortized portion of goodwill totaled $711.3 million.
Although goodwill amortization has no impact on the Company's
cash flows, the impact on annual earnings is approximately $19.4 million.
This amount 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 the goodwill. If the carrying
amount of the 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.
Sources of Liquidity
The Company has three primary sources of liquidity: (i) cash
provided by operations, (ii) commercial paper and (iii) uncommitted lines of
credit.
The Company issues commercial paper to finance, in part, its
seasonal inventory requirements and capital expenditures. The commercial
paper program is supported by a $670 million, five year unsecured revolving
credit facility which expires on May 30, 2002 and a $300 million unsecured
revolving credit facility which expires on June 30, 1998 (collectively, the
"Credit Facilities"). During the second quarter of 1998, the Company expects
to replace the $300 million credit facility with a 364 day unsecured revolving
line of credit. 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 or operating
flexibility.
The Company can also obtain up to $220 million of short-term
financing through various uncommitted lines of credit.
At March 28, 1998, the Company had $628.1 million of commercial
paper outstanding at a weighted average interest rate of 5.8% and $35.0
million outstanding under various uncommitted lines of credit at a weighted
average interest rate of 5.7%.
Management believes that the Company's cash on hand and cash
provided by operations, together with its ability to obtain additional
short-term and long-term financing, will be sufficient to cover its working
capital needs, capital expenditure, debt service requirements and future cash
outlays associated with the merger with Revco and the Merger with Arbor.
Year 2000
Since 1995, the Company has been actively addressing the nature
and impact of issues presented by the Year 2000. Accordingly, management
expects to identify and complete all modifications required to support the
Year 2000 in a timely manner and believes that the cost of such modifications
will not have a material impact on the Company's results of operations,
liquidity or capital resources. The Company has also communicated with its
key vendors and suppliers to identify the nature and potential impact of issues
presented by the Year 2000 on the businesses of such vendors and suppliers.
Management is not presently aware of any vendor or supplier-related issue
presented by the Year 2000 that could have a material impact on the Company.
Capital Expenditures
Capital expenditures totaled $312.1 million, $297.5 million and
$528.9 million in 1997, 1996 and 1995, respectively. 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) remodeling completed in connection with the Revco
integration.
During 1997, the Company opened 287 new stores (including
relocations of existing stores) and expects to open approximately 300 new
stores (including relocations) in 1998. Relocations involve moving existing
in-line shopping center stores to larger freestanding locations.
Historically, relocating stores to more convenient locations and larger sizes
has generated significant improvements in customer count and revenues, driven
largely by increased sales of higher margin front store merchandise.
Management believes that relocations offer a significant opportunity for
future growth, as less than 20% of the Company's existing stores are
freestanding. However, it is unknown at this time whether such relocations in
existing or new markets served by the Company will realize the same results as
those historically achieved.
Revised Dividend
On January 10, 1996, the Board of Director approved a reduction
in the Company's quarterly dividend from $0.38 per common share to $0.11 per
common share. The Company's Board of Directors recently increased the dividend
rate on the Common Stock. See "Recent Developments". Future dividends will be at
the discretion of the Company's Board of Directors and subject to future
operating performance and financial condition.
Certain Tax Matters
As of December 31, 1997, the Company had federal net operating
loss carryforwards ("NOLs") of approximately $33.9 million expiring in the
years 2003 through 2009.
Substantially all of these 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 (as
defined in such Note 2). Accordingly, the tax benefit of such NOLs utilized
during the three years ended December 31, 1997 (approximately $69.4 million,
$15.3 million and $18.8 million for 1997, 1996 and 1995, 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 will also
reduce Reorganization Goodwill.
Accounting Changes
During the fourth quarter of 1997, the Company was required to
retroactively adopt SFAS No. 128, "Earnings Per Share". This statement
requires companies with complex capital structures to present basic and
diluted earnings per common share in lieu of previously reported primary and
fully diluted earnings per common share. See Notes 2 and 18 to the
consolidated financial statements for further information about SFAS No. 128.
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 Notes 2 and 11 to the
consolidated financial statements for further information about SFAS No. 123.
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 accounting policy, long-lived assets were evaluated as a
group for impairment at the operating business level if the operating business
was either incurring operating losses or was expecting to incur operating losses
in the future. Since the expected future cash flows measured at the operating
business level were in excess of the carrying value of the related assets, no
previous impairment losses were recorded.
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 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
$0.28 per diluted common share in 1995.
Cautionary Statement Concerning Forward-Looking Statements
See "Cautionary Statement Regarding Forward-Looking Statements"
above.
SELLING STOCKHOLDER
The shares of Common Stock for which Automatic Common Exchange
Securities may be exchanged, or cash in lieu thereof, will be delivered to the
Trust by the Eugene Applebaum Revocable Living Trust (the "Selling
Stockholder"), a revocable grantor trust for the benefit of Eugene Applebaum,
the Chairman of the Board, President and Chief Executive Officer of Arbor
prior to the Merger with Arbor, pursuant to a forward purchase contract
between the Trust and the Selling Stockholder.
Mr. Applebaum has served as a member of CVS' Board of Directors
since April 1, 1998, following the consummation of the Merger with Arbor on
March 31, 1998. Since March 31, 1998, he has also served as a consultant to
CVS with respect to among other things, transitional issues and Michigan and
Toledo metropolitan real estate matters, pursuant to a Consulting Agreement
dated February 8, 1998 by and between himself and CVS. Prior to that time,
neither Mr. Applebaum nor the Selling Stockholder had any relationship with
the Company.
The following table sets forth certain information for the
Selling Stockholder with respect to such Selling Stockholder's beneficial
ownership of the Common Stock. The following table does not reflect that up to
3,047,500 shares of Common Stock may be delivered by the Selling Stockholder
to the CVS Automatic Common Exchange Security Trust pursuant to the forward
purchase contract referenced above.
Shares of
Common Stock
Beneficially
Name of Selling Stockholder Owned (1)
--------------------------- --------------------------
Number Percentage
------ ----------
Eugene Applebaum Revocable Living Trust(2)........ 3,935,309 2.1%
- ----------
(1) Information is as of March 31, 1998.
(2) Mr. Applebaum is the settlor, a co-trustee and, during his lifetime, the
sole beneficiary of the Selling Stockholder. The foregoing shares do not
include 2,098,230 shares (1.1% of the outstanding shares of Common Stock as
of March 3, 1998, including stock options granted to Mr. Applebaum that are
exercisable within 60 days) with respect to which Mr. Applebaum may be
deemed to have beneficial ownership in accordance with Commission
regulations, as described below: (i) 1,174,099 shares issuable upon exercise
of CVS options held by Mr. Applebaum, (ii) 238,650 shares held by a trust
for the benefit of Mr. Applebaum's grandchildren, the trustees of which are
Mr. Applebaum's wife and adult children, (iii) 314,122 shares held by trusts
for the benefit of Mr. Applebaum's adult children, the trustee of which is
Mrs. Applebaum, (iv) 236,359 shares owned by the Eugene Applebaum Family
Foundation, a private charitable foundation, (v) 84,571 shares owned by Mrs.
Applebaum, (vi) 28,950 shares allocated to Mr. Applebaum's 401(k) Plan
account, and (vii) 21,479 shares held in an IRA account for the benefit of
Mr. Applebaum. Mr. Applebaum disclaims beneficial ownership of the 873,702
shares described in items (ii), (iii), (iv) and (v).
In connection with the Merger with Arbor, the Company and
certain stockholders listed therein (the "Covered Stockholders") entered into
a Registration Rights Agreement dated as of March 31, 1998 (the "Registration
Rights Agreement"), a copy of which is included as an exhibit to the
Registration Statement of which this Prospectus is a part. Pursuant to the
Registration Rights Agreement, CVS agreed to use its reasonable best efforts
to cause a registration statement relating to the shares acquired by the
Covered Stockholders in the Merger with Arbor (each a "Selling Stockholder
Registration Statement") to be declared effective within 60 days after receipt
of a written request for registration from the Covered Stockholders (or 20
days in the case of the first such request) and generally to keep such Selling
Stockholder Registration Statement continuously effective until the earliest
of 30 days (subject to certain extensions) after the date such Selling
Stockholder Registration Statement is declared effective, such time as all
securities covered by the Registration Rights Agreement have been sold or
disposed of thereunder and such time as all securities subject to the
Registration Rights Agreement shall cease to be so subject. Pursuant to the
Registration Rights Agreement, the Covered Stockholders may request
registration on no more than three occasions and may make such a request only
once in any six-month period. Notwithstanding the foregoing, CVS is not
required to effect a registration unless the aggregate value of the shares
requested to be registered is equal to or more than $100 million. The method
of disposition requested by the Covered Stockholders in connection with any
demand registration may not be an offering on a delayed or continuous basis
pursuant to Rule 415 without the Company's prior written consent. On April
20, 1998, CVS and Mr. Applebaum, on behalf of himself and the other Covered
Stockholders, entered into Amendment No. 1 to the Registration Rights
Agreement pursuant to which, inter alia, (1) the parties agreed to waive the
Company's obligation to file with the SEC a registration statement in response
to an initial demand for registration request that the Covered Stockholders
delivered to the Company in March 1998 but subsequently revoked (the "March
1998 Demand"), (2) CVS acknowledged that the March 1998 Demand would not be
treated as a Demand Request, as such term is defined in the Registration
Rights Agreement, for purposes of the such agreement and (3) the parties
agreed to amend the time by which the Company must prepare and file a
registration statement in response to the demand request next succeeding the
March 1998 Demand. CVS has agreed to pay any and all expenses incidental to
performance of or compliance with any registration of shares of Common Stock
received by the Covered Stockholders in connection with the Merger with Arbor,
including, without limitation, (i) the fees, disbursements and expenses of
CVS' counsel and accountants (including in connection with the delivery of
opinions and/or comfort letters); (ii) all expenses, including filing fees, in
connection with the preparation, printing and filling of one or more
registration statements; (iii) the cost of printing or producing any
agreements among underwriters, underwriting agreements, and blue sky or legal
investment memoranda; (iv) the filing fees incidental to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
the sale of the securities to be disposed of; (v) transfer agents' and
registrars' fees and expenses in connection with such offering; (vi) all
security engraving and security printing expenses; (vii) all fees and expenses
payable in connection with the listing of the shares on any securities
exchange or automated interdealer quotation system on which the Common Stock
is then listed; and (viii) all reasonable fees and expenses of one legal
counsel for the Covered Stockholders in connection with each demand
registration, which legal counsel shall be selected by Covered Stockholders
owning a majority of the shares then being registered; provided that
registration expenses shall exclude (w) any expenses relating to any action
taken by CVS in connection with the public sale of securities pursuant to a
derivatives transaction with respect to the Covered Stockholders' shares over
and above the expenses that would have been incurred by CVS in connection with
an offering of such shares, (x) all underwriting discounts and commissions,
selling or placement agent or broker fees and commissions, and transfer taxes,
if any, in connection with the sale of any securities, (y) the fees and
expenses of counsel for any Covered Stockholder (other than pursuant to clause
(viii)) and (z) all costs and expenses of CVS incurred in connection with the
marketing of the shares in connection with any underwritten offering,
including without limitation any roadshow expenses.
DESCRIPTION OF CAPITAL STOCK
The summary of the terms of the capital stock of CVS set forth
below does not purport to be complete and is qualified by reference to the
certificate of incorporation and bylaws of CVS (the "CVS Charter" and the "CVS
Bylaws", respectively).
Authorized Capital Stock
Under the CVS Charter, CVS' authorized capital stock consists
of 1,000,000,000 shares of Common Stock, 120,619 shares of Cumulative
Preferred Stock, par value $0.01 per share (the "CVS Preferred Stock"), and
50,000,000 shares of Preference Stock, par value $1 per share (the "CVS
Preference Stock") (the CVS Preferred Stock and CVS Preference Stock being
referred to herein collectively as "Preferred Stock").
Common Stock
On May 4, 1998, there were 192,191,650 shares of Common Stock
outstanding (excluding 5,628,077 treasury shares), including 18,914,347 shares
of Common Stock issued in connection with the Merger with Arbor. The holders
of Common Stock are entitled to receive ratably, from funds legally available
for the payment thereof, dividends when and as declared by resolution of the
Board of Directors, subject to any preferential dividend rights granted to the
holders of any outstanding Preferred Stock. In the event of liquidation, each
share of Common Stock is entitled to share pro rata in any distribution of
CVS' assets after payment or providing for the payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Each holder of
Common Stock is entitled to one vote for each share of Common Stock held of
record on the applicable record date on all matters submitted to a vote of
stockholders, including the election of directors. In addition, holders of
Series One ESOP Convertible Preference Stock, $1 par value, of CVS ("CVS ESOP
Preference Stock") are entitled to vote on all matters submitted to a vote of
holders of Common Stock, voting together with the Common Stock as a single
class. Each share of CVS ESOP Preference Stock is entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
CVS ESOP Preference Stock could be converted, rounded to the nearest tenth on
the record date for the applicable meeting, which is currently 1.2 votes
(subject to adjustment in the case of certain dilutive events).
Holders of Common Stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other securities
and there are no conversion rights or redemption rights or sinking fund
provisions with respect to the Common Stock. All outstanding shares of Common
Stock are duly authorized, validly issued, fully paid and nonassessable.
CVS Preferred Stock and CVS Preference Stock
Prior to and upon consummation of the Merger with Arbor, (i)
approximately 5.32 million shares of CVS ESOP Preference Stock were issued and
outstanding and (ii) no other shares of Preferred Stock were issued or
outstanding. Under the CVS Charter, the Board of Directors has the authority,
without further stockholder approval but subject to certain limitations set
forth in the CVS Charter, to create one or more series of Preferred Stock, to
issue shares of Preferred Stock in such series up to the maximum number of
shares of the relevant class of Preferred Stock authorized, and to determine
the preferences, rights, privileges and restrictions of any such series,
including the dividend rights, voting rights, rights and terms of redemption,
liquidation preferences, the number of shares constituting any such series and
the designation of such series. Pursuant to this authority, the Board of
Directors could create and issue a series of Preferred Stock with rights,
privileges or restrictions, and adopt a stockholder rights plan, having the
effect of discriminating against an existing or prospective holder of such
securities as a result of such security holder beneficially owning or
commencing a tender offer for a substantial amount of Common Stock. One of the
effects of authorized but unissued and unreserved shares of capital stock may
be to render more difficult or discourage an attempt by a potential acquiror
to obtain control of CVS by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of CVS' management. The issuance
of such shares of capital stock may have the effect of delaying, deferring or
preventing a change in control of CVS without any further action by the
stockholders of CVS. CVS has no present intention to adopt a stockholder
rights plan, but could do so without stockholder approval at any future time.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. is the transfer agent
and registrar for the Common Stock.
UNDERWRITING
The Automatic Common Exchange Securities will be distributed as
described in the Trust Prospectus under the caption "Underwriting".
The Company and the Selling Stockholder have agreed that,
during the period beginning on the date of this Prospectus and continuing to
and including the date that is 90 days after the date of this Prospectus, they
will not offer, sell, contract to sell or otherwise dispose of any Common
Stock or other securities of the Company (other than pursuant to employee
stock option plans existing, or on the conversion or exchange of convertible
or exchangeable securities outstanding, on the date of this Prospectus) which
are substantially similar to the Common Stock or which are convertible or
exchangeable into Common Stock or other securities which are substantially
similar to the Common Stock, without the prior written consent of Goldman
Sachs & Co., except pursuant to the offering of Automatic Common Exchange
Securities described below.
In connection with the offering of the Automatic Common Exchange
Securities, the Underwriters may purchase and sell the Automatic Common Exchange
Securities and the Common Stock in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Automatic Common
Exchange Securities and the Common Stock; and short positions created by the
Underwriters involve the sale by the Underwriters of a greater number of
Automatic Common Exchange Securities than they are required to purchase from the
Trust in the offering. The Underwriters also may impose a penalty bid, whereby
selling concessions allowed to broker-dealers in respect of the Automatic Common
Exchange Securities sold in the offering may be reclaimed by the Underwriters if
securities are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Automatic Common Exchange Securities, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the NYSE, in the over-the-counter market or otherwise.
The Company and the Selling Stockholder have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act.
Up to 2,650,000 shares of Common Stock (or up to
3,047,500 shares if the applicable over-allotment option is exercised in full)
may be delivered by the CVS Automatic Common Exchange Security Trust to holders
of the Automatic Common Exchange Securities upon exchange of the Automatic
Common Exchange Securities on May __, 2001 (the "Exchange Date"). In lieu of
delivery of such shares, the Selling Stockholder may elect to pay cash on the
Exchange Date for each share then deliverable in an amount equal to the then
"Average Market Price" of the Common Stock in accordance with the terms of the
Automatic Common Exchange Securities. The Automatic Common Exchange Securities
are being offered through an underwriter or underwriters in the manner described
in the Trust Prospectus.
TRUST PROSPECTUS
The Automatic Common Exchange Securities are being offered
pursuant to the Trust Prospectus. This Prospectus relates only to the Common
Stock that may be delivered upon exchange of the Automatic Common Exchange
Securities. The Company takes no responsibility for any information included
in or omitted from the Trust Prospectus. The Trust Prospectus does not
constitute a part of this Prospectus nor is it incorporated by reference
herein.
VALIDITY OF COMMON STOCK
The validity of the Common Stock will be passed upon for the
Company by Davis Polk & Wardwell, for the Underwriter by Sullivan & Cromwell,
and for the Selling Stockholder by Honigman Miller Schwartz and Cohn.
EXPERTS
The historical consolidated financial statements of CVS
Corporation and its subsidiaries as of December 31, 1997 and 1996 and for the
three years ended December 31, 1997 and the related consolidated financial
statement schedule have been incorporated by reference in this Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and given upon
the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for
the three months ended March 28, 1998 and March 29, 1997, incorporated by
reference herein, the independent certified public accountants have reported
that they applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report included in
the Company's quarterly report on Form 10-Q for the quarter ended March 28,
1998, and incorporated by reference herein, states that they did not audit and
they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
The accountants are not subject to the liability provisions of Section 11 of
the Securities Act of 1933 for their report on the unaudited interim financial
information because that report is not a "report" or a "part" of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Act.
================================================================================
No person has been authorized to give any information or to make
any representations other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Page
Available Information..........................................A-3
Incorporation of Certain Documents
by Reference.............................................A-3
Cautionary Statement Regarding
Forward-Looking Statements...............................A-4
The Company....................................................A-5
Recent Developments............................................A-9
Use of Proceeds...............................................A-10
Price Range of Common Stock ..................................A-10
Dividend Policy...............................................A-10
Selected Historical Consolidated
Financial and Operating Data............................A-11
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...............................A-14
Selling Stockholder...........................................A-27
Description of Capital Stock..................................A-29
Underwriting..................................................A-30
Trust Prospectus..............................................A-31
Validity of Common Stock......................................A-31
Experts.......................................................A-31
================================================================================
2,650,000 Shares
CVS Corporation
Common Stock
(par value $.01 per share)
----------
CVS
----------
Goldman, Sachs & Co.
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses payable by
the Company in connection with the registration of the shares. The Selling
Stockholder will not incur any expenses in connection with the registration of
the shares hereunder. All of such expenses except the Securities and Exchange
Commission registration fee are estimated:
Securities and Exchange Commission registration fee....... $ 61,723
Blue sky fees and expenses................................ *
NASD filing fee........................................... $ 17,930
Printing expense.......................................... *
Accounting fees and expenses.............................. *
Legal fees and expenses................................... $200,000
Miscellaneous............................................. *
--------
Total.................................................. $ *
========
- ----------
*To be completed by amendment.
Item 15. Indemnification of Directors and Officers
Exculpation. Section 102(b)(7) of the Delaware Law permits a
corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision may not eliminate or limit
the liability of a director for any breach of the director's duty of loyalty
to the corporation or its stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
for the payment of unlawful dividends, or for any transaction from which the
director derived an improper personal benefit.
The CVS Charter limits the personal liability of a director to
CVS and its stockholders for monetary damages for a breach of fiduciary duty
as a director to the fullest extent permitted by law.
Indemnification. Section 145 of the Delaware Law permits a
corporation to indemnify any of its directors or officers who was or is a
party, or is threatened to be made a party to any third party proceeding by
reason of the fact that such person is or was a director or officer of the
corporation, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reason to believe that such person's
conduct was unlawful. In a derivative action, i.e., one by or in the right of
a corporation, the corporation is permitted to indemnify directors and
officers against expenses (including attorneys' fees) actually and reasonably
incurred by them in connection with the defense or settlement of an action or
suit if they acted in good faith and in a manner that they reasonably believed
to be in or not opposed to the best interests of the corporation, except that
no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine upon application that the
defendant directors or officers are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Expenses, including attorneys' fees, incurred by any such
person in defending any such action, suit or proceeding shall be paid or
reimbursed by the corporation in advance of the final disposition of such
action, suit or proceeding upon receipt by it of an undertaking of such person
to repay such expenses if it shall ultimately be determined that such person
is not entitled to be indemnified by the corporation.
The CVS Charter provides for indemnification of directors and
officers of CVS against liability they may incur in their capacities as such
to the fullest extent permitted under the Delaware Law.
Insurance. CVS has in effect Directors and Officers Liability
Insurance with a limit of $100,000,000 and pension trust liability insurance
with a limit of $50,000,000. This insurance was purchased in layers from
National Union Fire Insurance Company of Pittsburgh, Pennsylvania; Federal
Insurance Company of Warren, New Jersey; Royal Indemnity Company of Charlotte,
North Carolina; Columbia Casualty Insurance Company of Chicago, Illinois; St.
Paul Surplus Lines Company of St. Paul, Minnesota; and Reliance Insurance
Company of Philadelphia, Pennsylvania. The pension trust liability insurance
covers actions of directors and officers as well as other employees with
fiduciary responsibilities under ERISA.
Revco Directors and Officers. The Merger Agreement dated as of
July 1997 among CVS and Revco (the "Revco Merger Agreement") provides that CVS
will cause Revco and its Subsidiaries to indemnify (including the payment of
reasonable fees and expenses of legal counsel) the current or former directors
or officers of Revco to the fullest extent permitted by law for damages and
liabilities arising out of facts and circumstances occurring at or prior to
the Merger. The Revco Merger Agreement also provides that for a period of six
years after the Merger CVS will cause to be maintained in effect Revco's
existing policies of directors' and officers' liability insurance as in effect
on February 6, 1997 (provided that CVS may substitute policies with reputable
and financially sound carriers having at least the same coverage and amounts
and containing terms and conditions that are no less advantageous) with
respect to facts or circumstances occurring at or prior to the Merger;
provided that if the annual premium for such insurance during such six-
year period exceeds 200% of the annual premiums paid by Revco as of February
6, 1997 for such insurance (such 200% amount, the "Maximum Premium") then CVS
will cause Revco to provide the most advantageous directors' and officers'
insurance coverage then available for an annual premium equal to the Maximum
Premium.
Arbor Directors and Officers. The Agreement and Plan of Merger
dated as of February 8, 1998, among CVS, Arbor and Red Acquisition, Inc.
provides that after the Effective Time (as defined in the Merger Agreement),
CVS will cause Arbor to indemnify (including the payment of reasonable fees
and expenses of legal counsel) each person who was a director or officer of
Arbor or its subsidiaries at or prior to the date of the Merger Agreement to
the fullest extent permitted by law for damages and liabilities arising out of
facts and circumstances occurring at or prior to the Effective Time. The
Merger Agreement also provides that, for a period of six years after the
Effective Time, CVS will maintain in effect Arbor's existing policies of
directors' and officers' liability insurance as in effect on February 8, 1998
(provided that CVS may substitute policies with reputable and financially
sound carriers having at least the same coverage and amounts and containing
terms and conditions that are no less advantageous to the covered persons)
with respect to facts or circumstances occurring at or prior to the Effective
Time; provided that if the aggregate annual premium for such insurance during
such six-year period exceeds 200% of the aggregate annual premium paid by Arbor
as of February 8, 1998 for such insurance, then CVS will cause Arbor to
provide the most advantageous directors' and officers' insurance coverage then
available for an annual premium equal to such 200% of the February 8, 1998
premiums.
Item 16. Exhibits
See index to exhibits at E-1.
Item 17. Undertakings
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 15
above or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, CVS
Corporation has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the city of Woonsocket, State of Rhode Island, on May 15, 1998.
CVS CORPORATION
By: /s/ Charles C. Conaway
-------------------------------
Charles C. Conaway
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer and May 15, 1998
* Director (Principal Executive Officer)
- --------------------------------
Thomas M. Ryan
Executive Vice President and Chief May 15, 1998
Financial Officer (Principal Financial
/s/ Charles C. Conaway Officer)
- --------------------------------
Charles C. Conaway
* Vice President (Principal Accounting Officer) May 15, 1998
- --------------------------------
Larry D. Solberg
* Director May 15, 1998
- --------------------------------
Allan J. Bloostein
* Director May 15, 1998
- --------------------------------
W. Don Cornwell
* Director May 15, 1998
- --------------------------------
Thomas P. Gerrity
* Chairman of the Board and Director May 15, 1998
- --------------------------------
Stanley P. Goldstein
* Director May 15, 1998
- --------------------------------
William H. Joyce
* Director May 15, 1998
- --------------------------------
Terry R. Lautenbach
* Director May 15, 1998
- --------------------------------
Terrence Murray
* Director May 15, 1998
- --------------------------------
Sheli Z. Rosenberg
* Director May 15, 1998
- --------------------------------
Ivan G. Seidenberg
* Director May 15, 1998
- --------------------------------
Thomas O. Thorsen
* Director May 15, 1998
- --------------------------------
Eugene Applebaum
By: /s/ Charles C. Conaway Attorney-in-Fact
- --------------------------------
Charles C. Conaway
</TABLE>
INDEX TO EXHIBITS
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
2.1 Agreement and Plan of Merger dated as of February 8,
1998, among the Registrant, Arbor Drugs, Inc. and Red
Acquisition, Inc. (incorporated by reference to Annex
A of the Joint Proxy Statement/Prospectus contained in
the Registration Statement on Form S-4 No. 333-47193
dated March 2, 1998)
4.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of CVS
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986)
4.1A Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Registrant*
4.2 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 of CVS Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1996)
4.3 Specimen Common Stock certificate (incorporated by
reference to Exhibit 4-1 to the Registrant's
Registration Statement on Form 8-B dated November 4,
1996)
4.4 Registration Rights Agreement dated as of March 31, 1998
4.5 Amendment No. 1 to Registration Rights Agreement dated as of
April 20, 1998
5.1 Opinion of Davis Polk & Wardwell regarding the
validity of the securities being registered
15.1 Letter re: Unaudited Interim Financial Information
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Davis Polk & Wardwell (contained in the
Opinion of Counsel filed as Exhibit 5.1 hereto)
24.1 Power of Attorney+
- ----------
*To be filed by amendment.
+Previously filed.
Exhibit 4.4
REGISTRATION RIGHTS AGREEMENT
AGREEMENT dated as of March 31, 1998, among CVS Corporation,
a Delaware corporation (the "Issuer"), and the Investors as defined herein.
W I T N E S S E T H:
WHEREAS, this Agreement is being entered into in connection
with the closing under the Merger Agreement referred to below;
NOW, THEREFORE, in consideration of the foregoing and the
mutual promises, representations, warranties, covenants and agreements
contained herein, the parties hereto, intending to be legally bound hereby,
agree as follows:
ARTICLE 1
Definitions
Section 1.1. Definitions. Terms defined in the Agreement and
Plan of Merger dated as of February 8, 1998, as amended as of March 2, 1998,
among the Issuer, Arbor Drugs, Inc., a Michigan corporation, and Red
Acquisition, Inc., a Michigan corporation, are used herein as defined therein.
In addition, the following terms, as used herein, shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission or
any successor governmental body or agency.
"Common Stock" means the common stock, par value $.01 per
share, of the Issuer.
"Demand Registration" has the meaning ascribed thereto in
Section 2.02(a)(i).
"Demand Request" has the meaning ascribed thereto in Section
2.02(a).
"Disadvantageous Condition" has the meaning ascribed thereto in
Section 2.04.
"Holder" means a Person who owns Registrable Securities and is
either (i) an Investor or (ii) a Person that (A) has agreed to be bound by the
terms of this Agreement as if such Person were an Investor and (B)(x) is a
Person (1) to whom an Investor has transferred Registrable Securities or (2)
with whom an Investor has entered into an agreement to transfer Registrable
Securities, in each case as part of a transaction pursuant to which derivative
securities relating to such Registrable Securities will be offered for sale by
such Person in a registered public offering or (y) is (1) upon the death of
any individual Investor, the executor of the estate of such Investor or such
Investor's heirs, devisees, legatees or assigns or (2) upon the disability of
any individual Investor, any guardian or conservator of such Investor.
"Investors" means the Persons listed on Schedule I hereto.
"1933 Act" means the Securities Act of 1933, as amended.
"Registrable Securities" means Common Stock acquired by the
Investors pursuant to the Option Agreement or the Merger or pursuant to any
option granted by the Issuer to any Stockholder (and any shares of stock or
other securities into which or for which such Common Stock may hereafter be
changed, converted or exchanged and any other shares or securities issued to
Holders of such Common Stock (or such shares of stock or other securities into
which or for which such shares are so changed, converted or exchanged) upon any
reclassification, share combination, share subdivision, share dividend, share
exchange, merger, consolidation or similar transaction or event). As to any
particular Registrable Securities, such Registrable Securities shall cease to
be Registrable Securities as soon as (i) such Registrable Securities have been
sold or otherwise disposed of pursuant to a registration statement that was
filed with the Commission and declared effective under the 1933 Act, (ii) as
soon as all such Registrable Securities held by a Holder can be sold in a
single transaction pursuant to Rule 144 or Rule 145, or (iii) they shall have
been otherwise sold, transferred or disposed of by a Holder to any Person that
is not a Holder.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
Article II, including, without limitation, (i) the fees, disbursements and
expenses of the Issuer's counsel and accountants (including in connection with
the delivery of opinions and/or comfort letters) in connection with this
Agreement and the performance of the Issuer's obligations hereunder; (ii) all
expenses, including filing fees, in connection with the preparation, printing
and filing of one or more registration statements hereunder; (iii) the cost of
printing or producing any agreements among underwriters, underwriting
agreements, and blue sky or legal investment memoranda; (iv) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (v) transfer agents' and registrars' fees and expenses in
connection with such offering; (vi) all security engraving and security
printing expenses; (vii) all fees and expenses payable in connection with the
listing of the Registrable Securities on any securities exchange or automated
interdealer quotation system on which the Common Stock is then listed; and
(viii) all reasonable fees and expenses of one legal counsel for the Holders
in connection with each Demand Registration, which legal counsel shall be
selected by Holders owning a majority of the Registrable Securities then being
registered; provided that Registration Expenses shall exclude (w) any expenses
relating to any action taken by the Issuer in connection with a request under
Section 2.03(a) over and above the expenses that would have been incurred by
the Issuer in connection with an offering of Registrable Securities, (x) all
underwriting discounts and commissions, selling or placement agent or broker
fees and commissions, and transfer taxes, if any, in connection with the sale
of any securities, (y) the fees and expenses of counsel for any Holder (other
than pursuant to clause (viii)) and (z) all costs and expenses of the Issuer
incurred as contemplated in Section 2.06(g).
"Rule 144" means Rule 144 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Rule 145" means Rule 145 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Rule 415 Offering" means an offering on a delayed or
continuous basis pursuant to Rule 415 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Selling Holder" means any Holder who sells Registrable
Securities pursuant to a public offering registered hereunder.
References in this Agreement to an "underwritten public
offering" of Registrable Securities or "underwritten offering" of Registrable
Securities and words of similar meaning shall include, without limitation, any
offering through underwriters of (i) Registrable Securities or (ii) securities
of a trust or other special purpose vehicle formed for the purpose of
disposing of Registrable Securities, whether the securities described in (i)
and (ii) are offered separately or in conjunction with each other, if in
connection with such offering Registrable Securities are required to be
registered under the 1933 Act; provided that the provisions of this Agreement,
including without limitation Sections 2.05 and 2.08, shall not apply to any
registration of or registration statement relating to such trust or other
special purpose vehicle, except that the indemnity and contribution provisions
of Section 2.08 shall apply to information relating to the Issuer or to the
Registrable Securities in the case of such a registration or registration
statement (but not to the securities of the special purpose vehicle or the
trust or any other matter related to such special purpose vehicle or the
trust).
Section 1.2. Internal References. Unless the context
indicates otherwise, references to Articles, Sections and paragraphs shall
refer to the corresponding Articles, Sections and paragraphs in this Agreement,
and references to the parties shall mean the parties to this Agreement.
ARTICLE 2
Registration Rights
Section 2.1. Demand Registration. (a) Upon written notice to
the Issuer from one or more Holders at any time after the Effective Time (but
not later than the date that is two years after the Effective Time) (a "Demand
Request") requesting that the Issuer effect the registration under the 1933
Act of any or all of the Registrable Securities held by such requesting
Holders, which notice shall specify the intended method or methods of
disposition of such Registrable Securities, the Issuer shall prepare and,
within 60 days after such request (or 20 days in the case of the first such
request), file with the Commission a registration statement with respect to
such Registrable Securities and thereafter use its reasonable best efforts to
cause such registration statement to be declared effective under the 1933 Act
for purposes of dispositions in accordance with the intended method or methods
of disposition stated in such request. Notwithstanding any other provision of
this Agreement to the contrary:
(i) the Holders may collectively exercise their rights to request
registration under this Section 2.01(a) on not more than three
occasions (it being understood that a demand with respect to a
two-tranche contemporaneous offering of Registrable Securities
and related derivative securities shall be deemed to be only one
demand) (each such registration being referred to herein as a
"Demand Registration");
(ii) the Issuer shall not be required to effect a Demand
Registration hereunder unless the aggregate market value of
Registrable Securities to be registered pursuant to such Demand
Registration is equal to or more than $100 million;
(iii) the Holders shall not be permitted to make a request for a
Demand Registration more than once in any six-month period; and
(iv) the method of disposition requested by Holders in connection
with any Demand Registration may not be a Rule 415 Offering
without the Issuer's prior written consent, which consent shall
be in the Issuer's sole discretion.
(b) Notwithstanding any other provision of this Agreement to the
contrary, a Demand Registration requested by Holders pursuant to this Section
2.01 shall not be deemed to have been effected, and, therefore, not requested
and the rights of each Holder shall be deemed not to have been exercised for
purposes of paragraph (a) above, if such Demand Registration has not become
effective under the 1933 Act or if such Demand Registration, after it became
effective under the 1933 Act, was not maintained effective under the 1933 Act
(other than as a result of the request of Holders, or any stop order,
injunction or other order or requirement of the Commission or other government
agency or court solely on the account of a material misrepresentation or
omission of a Holder) for at least 30 days (or such shorter period ending when
all the Registrable Securities covered thereby have been disposed of pursuant
thereto) and, as a result thereof, the Registrable Securities requested to be
registered cannot be distributed in accordance with the plan of distribution
set forth in the related registration statement.
(c) The Issuer shall have the right to cause the registration of
additional equity securities for sale for the account of the Issuer in the
registration of Registrable Securities requested by the Holders pursuant to
Section 2.01(a) above; provided that if such Holders are advised in writing
(with a copy to the Issuer) by the lead or managing underwriter referred to
in Section 2.03(b) that, in such underwriter's good faith view, all or a
part of such Registrable Securities and additional equity securities cannot
be sold and the inclusion of such Registrable Securities and additional
equity securities in such registration would be likely to have an adverse
effect on the price, timing or distribution of the offering and sale of the
Registrable Securities and additional equity securities then contemplated,
then Issuer shall be entitled to include in such registration only such
number of additional equity securities, if any, which, when added to the
Registrable Securities requested by the Holders pursuant to Section 2.01(a)
above, would not exceed the number of securities that can, in the good
faith view of such underwriter, be sold in such offering without so
adversely affecting such offering.
(d) Within 10 days after delivery of a Demand Request by a
Holder, the Issuer shall provide a written notice to each Holder, advising
such Holder of its right to include any or all of the Registrable
Securities held by such Holder for sale pursuant to the Demand Registration
and advising such Holder of procedures to enable such Holder to elect to so
include Registrable Securities for sale in the Demand Registration. Any
Holder may, within 10 days of delivery to such Holder of a notice pursuant
to this Section 2.01(d), elect to so include Registrable Securities in the
Demand Registration by written notice to such effect to the Issuer
specifying the number of Registrable Securities desired to be so included
by such Holder.
Section 2.2. Piggyback Registrations. (a) At any time after
the Effective Time (but not later than two years after the Effective Time) if
the Issuer proposes (other than pursuant to a Demand Registration or on Forms
S-4 or S-8 or any successor forms) to register any of its equity securities
under the 1933 Act (whether for the Issuer's own account or for the account of
any other Person), the Issuer will give prompt written notice to all Holders
of its intention to effect such a registration, and such notice shall offer
the Holders the opportunity to register on the same terms and conditions such
number of shares of Registrable Securities as such Holder may request (a
"Piggyback Registration"). The Issuer will include in such registration all
Registrable Securities with respect to which the Issuer has received written
requests for inclusion therein within 10 days after the receipt by such Holder
of the Issuer's notice, subject to the provisions of Section 2.02(b) below;
provided that the Holders may collectively exercise their right to request
Piggyback Registration on not more than three occasions.
(b) If the Issuer is advised in writing (with a copy to the Holders
participating in the Piggyback Registration) by the lead or managing
underwriter that, in such underwriter's good faith view, all or a part of such
Registrable Securities and other equity securities proposed to be sold for the
account of the Issuer or any other Person cannot be sold and the inclusion of
such Registrable Securities and other equity securities in such registration
would be likely to have an adverse effect on the price, timing or distribution
of the offering and sale of the Registrable Securities and other equity
securities then contemplated, then the Issuer will include any securities to
be sold in such registration in the following order: (i) first, the
securities the Issuer proposes to sell for its own account, and (ii) second,
the Registrable Securities and other equity securities requested to be
included in such registration by the Holders and other holders pro rata in
proportion to the amount requested to be included therein by each Holder and
other holder.
Section 2.3. Other Matters in Connection with Registrations.
(a) Notwithstanding the express terms of this Agreement, but subject to the
general provisions hereof regarding the rights of Holders and the obligations
of Issuer, the Issuer shall take such action as may reasonably be requested by
the Holders to facilitate the public sale of securities pursuant to a
derivatives transaction sought to be engaged in by the Holders with respect to
the Registrable Securities for hedging or other purposes (it being understood
that any registration under the 1933 Act by the Issuer in accordance with any
such request shall count as a Demand Registration for purposes of Section
2.01, subject to Section 2.01(b)).
(b) Each Holder shall keep the Issuer informed of the number of
Registrable Securities held from time-to-time by each such Holder, and of each
sale, transfer or other disposition of Registrable Securities (including the
number of shares sold) by each such Holder.
(c) In the event that any public offering pursuant to a Demand
Registration shall involve, in whole or in part, an underwritten offering, the
Holders owning a majority of the Registrable Securities proposed to be sold
therein shall have the right to designate the lead underwriter of such
underwritten offering and, in the case of a public offering of Registrable
Securities (but not derivative securities) requested to be registered pursuant
to Section 2.01(a), the Issuer shall have the right to designate an
underwriter as co-manager for such offering.
Section 2.4. Certain Delay Rights. Notwithstanding any other
provision of this Agreement to the contrary, with respect to any registration
statement filed or to be filed pursuant to Section 2.01, if the Issuer
provides written notice to each Holder that in the Issuer's good faith and
reasonable judgment it would be materially disadvantageous to the Issuer
(because the sale of Registrable Securities covered by such registration
statement or the disclosure of information therein or in any related
prospectus or prospectus supplement would materially interfere with any
acquisition, financing or other material event or transaction in connection
with which a registration of securities under the 1933 Act for the account of
the Issuer is then intended or the public disclosure of which at the time
would be materially prejudicial to the Issuer) (a "Disadvantageous Condition")
for such a registration statement to be maintained effective, or to be filed
and become effective, and setting forth the general reasons for such judgment,
the Issuer shall be entitled to cause such registration statement to be
withdrawn or the effectiveness of such registration statement terminated, or,
in the event no registration statement has yet been filed, shall be entitled
not to file any such registration statement, until such Disadvantageous
Condition no longer exists (notice of which the Issuer shall promptly deliver
to each Holder). With respect to each Holder, upon the receipt by such Holder
of any such notice of a Disadvantageous Condition if so directed by the Issuer
by notice as aforesaid, such Holder will deliver to the Issuer all copies,
other than permanent file copies then in such Holder's possession, of the
prospectus and prospectus supplements then covering such Registrable
Securities at the time of receipt of such notice as aforesaid. Notwithstanding
anything else contained in this Agreement, neither the filing nor the
effectiveness of any registration statement under Section 2.01 may be delayed
(i) for more than a total of 60 days pursuant to this Section 2.04 or (ii) in
the case of the first Demand Request so long as it requires the Issuer to file
the related registration statement within 20 days after the Effective Time.
Section 2.5. Expenses. Except as provided herein, the Issuer
shall pay all Registration Expenses with respect to each registration
hereunder. Notwithstanding the foregoing, (i) each Holder shall be responsible
for the legal fees and expenses of its own counsel (except as provided in
clause (viii) of the definition of Registration Expenses), (ii) each Holder
shall be responsible for all underwriting discount and commissions, selling or
placement agent or broker fees and commissions, and transfer taxes, if any, in
connection with the sale of securities by such Holder and (iii) Section
2.03(a).
Section 2.6. Registration and Qualification. If and whenever
the Issuer is required to effect the registration of any Registrable
Securities under the 1933 Act as provided in Section 2.01, the Issuer shall
use its reasonable best efforts to (but subject to the provisions of Section
2.01):
(a) prepare, file and cause to become effective a registration
statement under the 1933 Act relating to the Registrable Securities to be
offered in accordance with the intended method of disposition thereof;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the 1933 Act with
respect to the disposition of all Registrable Securities in the case of the
Demand Registration, until the earlier of such time as all Registrable
Securities proposed to be sold therein have been disposed of in accordance
with the intended methods of disposition set forth in such registration
statement and the expiration of 30 days after such registration statement
becomes effective; provided that such 30-day period shall be extended for
such number of days that equals the number of days elapsing from (x) the
date the written notice contemplated by paragraph (e) below is given by the
Issuer to (y) the date on which the Issuer delivers to the Holders of
Registrable Securities the supplement or amendment contemplated by
paragraph (e) below;
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed copies
of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus included in such registration statement (including each
preliminary prospectus), in conformity with the requirements of the 1933
Act, and such documents incorporated by reference in such registration
statement or prospectus, as the Holders of Registrable Securities or such
underwriter may reasonably request;
(d) furnish to any underwriter of such Registrable Securities an
opinion of counsel for the Issuer and a "cold comfort" letter signed by the
independent public accountants who have audited the financial statements of
the Issuer included in the applicable registration statement, in each such
case covering substantially such matters with respect to such registration
statement (and the prospectus included therein) and the related offering as
are customarily covered in opinions of issuer's counsel with respect
thereto and in accountants' letters delivered to underwriters in
underwritten public offerings of securities and such other matters as such
underwriters may reasonably request;
(e) promptly notify the Selling Holders in writing (i) at any time
when a prospectus relating to a registration pursuant to Section 2.01 or
2.02 is required to be delivered under the 1933 Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, and (ii) of any request by the
Commission or any other regulatory body or other body having jurisdiction
for any amendment of or supplement to any registration statement or other
document relating to such offering, and in either such case, at the request
of the Selling Holders prepare and furnish to the Selling Holders a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading;
(f) list all such Registrable Securities covered by such
registration on each securities exchange and automated inter-dealer
quotation system on which the Common Stock is then listed;
(g) use reasonable efforts to assist the Holders in the marketing
of Registrable Securities in connection with up to three underwritten
offerings hereunder (including, to the extent reasonably consistent with
work commitments, using reasonable efforts to have officers of the Issuer
attend "road shows" and analyst or investor presentations scheduled in
connection with such registration); and
(h) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected
pursuant to Sections 2.01 or 2.02 unlegended certificates representing
ownership of the Registrable Securities being sold in such denominations as
shall be requested by the Selling Holders or the underwriters.
Section 2.7. Underwriting; Due Diligence. (a) If requested by
the underwriters for any underwritten offering of Registrable Securities
pursuant to a Demand Registration, the Issuer shall enter into an underwriting
agreement with such underwriters for such offering, which agreement will
contain such representations and warranties by the Issuer and such other terms
and provisions as are customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation,
indemnification and contribution provisions substantially to the effect and to
the extent provided in Section 2.08, subject to such modifications as may
reasonably be requested by the lead or managing underwriter for any such
underwritten offering, and agreements as to the provision of opinions of
counsel and accountants, letters to the effect and to the extent provided in
Section 2.06(d). Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and such other terms
and provisions as are customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation,
indemnification and contribution provisions substantially to the effect and to
the extent provided in Section 2.08, subject to such modifications as may
reasonably be requested by the lead or managing underwriter for any such
underwritten offering.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the 1933
Act pursuant to this Article II, the Issuer shall give the Holders of such
Registrable Securities and the underwriters, if any, and their respective
counsel and accountants (the identity and number of whom shall be
reasonably acceptable to the Issuer), such reasonable and customary access
to its books, records and properties and such opportunities to discuss the
business and affairs of the Issuer with its officers and the independent
public accountants who have certified the financial statements of the
Issuer as shall be necessary, in the opinion of such Holders and such
underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the 1933 Act; provided that the
foregoing shall not require the Issuer to provide access to (or copies of)
any competitively sensitive information relating to the Issuer or its
Subsidiaries or their respective businesses; and provided further that (i)
each Holder and the underwriters and their respective counsel and
accountants shall have entered into a confidentiality agreement reasonably
acceptable to the Issuer and (ii) the Holders and the underwriters and
their respective counsel and accountants shall use their reasonable best
efforts to minimize the disruption to the Issuer's business and coordinate
any such investigation of the books, records and properties of the Issuer
and any such discussions with the Issuer's officers and accountants so that
all such investigations occur at the same time and all such discussions
occur at the same time.
Section 2.8. Indemnification and Contribution. (a) The Issuer
agrees to indemnify and hold harmless each Selling Holder and each person, if
any, who controls each Selling Holder within the meaning of either Section 15
of the 1933 Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or any
amendment thereof, any preliminary prospectus or prospectus (as amended or
supplemented if the Issuer shall have furnished any amendments or supplements
thereto) relating to the Registrable Securities, or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based
upon information furnished to the Issuer in writing by a Selling Holder
expressly for use therein. The Issuer also agrees to indemnify any underwriter
of the Registrable Securities so offered and each person, if any, who controls
such underwriter on substantially the same basis as that of the
indemnification by the Issuer of the Selling Holder provided in this Section
2.08(a).
(b) Each Selling Holder agrees to indemnify and hold harmless
the Issuer, its directors, the officers who sign any registration statement
and each person, if any who controls the Issuer within the meaning of
either Section 15 of the 1933 Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or alleged untrue statement of a material fact contained
in any registration statement or any amendment thereof, any preliminary
prospectus or prospectus (as amended or supplemented if the Issuer shall
have furnished any amendments or supplements thereto) relating to the
Registrable Securities, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but only with reference to
information furnished in writing by a Selling Holder (or any representative
thereof) expressly for use in a registration statement, any preliminary
prospectus, prospectus or any amendments or supplements thereto. Each
Selling Holder also agrees to indemnify any underwriter of the Registrable
Securities so offered and each person, if any, who controls such
underwriter on substantially the same basis as that of the indemnification
by such Selling Holder of the Issuer provided in this Section 2.08(b).
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action; provided that the
failure to notify the indemnifying party shall not relieve it from any
liability that it may have to an indemnified party on account of the indemnity
agreement contained in paragraph (a) or (b) above except to the extent that
the indemnifying party was actually prejudiced by such failure, and in no
event shall such failure relieve the indemnifying party from any other
liability that it may have to such indemnified party. If any such claim or
action shall be brought against an indemnified party, and it shall have
notified the indemnifying party thereof, unless based on the written advice of
counsel to such indemnified party a conflict of interest between such
indemnified party and indemnifying parties may exist in respect of such claim,
the indemnifying party shall be entitled to participate therein, and, to the
extent that it wishes, jointly with any other similarly notified indemnifying
party, to assume the defense thereof. After notice from the indemnifying party
to the indemnified party of its election to assume the defense of such claim
or action, the indemnifying party shall not be liable to the indemnified party
under this Section 2.08 for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense thereof. Any
indemnifying party against whom indemnity may be sought under this Section
2.08 shall not be liable to indemnify an indemnified party if such indemnified
party settles such claim or action without the consent of the indemnifying
party. The indemnifying party may not agree to any settlement of any such
claim or action, other than solely for monetary damages for which the
indemnifying party shall be responsible hereunder, the result of which any
remedy or relief shall be applied to or against the indemnified party, without
the prior written consent of the indemnified party, which consent shall not be
unreasonably withheld. In any action hereunder as to which the indemnifying
party has assumed the defense thereof, the indemnified party shall continue to
be entitled to participate in the defense thereof, with counsel of its own
choice, but the indemnifying party shall not be obligated hereunder to
reimburse the indemnified party for the costs thereof.
(d) If the indemnification provided for in this Section 2.08
shall for any reason be unavailable (other than in accordance with its
terms) to an indemnified party in respect of any loss, liability, cost,
claim or damage referred to therein, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid
or payable by such indemnified party as a result of such loss, liability,
cost, claim or damage (i) in such proportion as is appropriate to reflect
the relative benefits received by the Issuer on the one hand and the
Selling Holders on the other hand from the offering of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the indemnifying party or parties on the one
hand and of the indemnified party or parties on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Issuer on the one
hand and the Selling Holders on the other hand in connection with the
offering of the Registrable Securities shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the
Registrable Securities (before deducting expenses) received by the Issuer
and the Selling Holders, respectively, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the
Issuer on the one hand and the Selling Holders on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Issuer or a Selling Holder and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The amount paid or payable by an indemnified party as a
result of the loss, cost, claim, damage or liability, or action in respect
thereof, referred to above in this paragraph (d) shall be deemed to
include, for purposes of this paragraph (d), any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. The Issuer and the
Selling Holders agree that it would not be just and equitable if
contribution pursuant to this Section 2.08 were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in this paragraph.
Notwithstanding any other provision of this Section 2.08, no Selling Holder
shall be required to contribute any amount in excess of the amount by which
the total price at which the Registrable Securities of such Selling Holder
were offered to the public exceeds the amount of any damages which such
Selling Holder has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The obligations of the parties under this Section 2.08
shall be in addition to any liability which any party may otherwise have to
any other party.
Section 2.9. Holdback Agreement. In connection with an
underwritten public offering of Registrable Securities effected pursuant to
this Article II, each Selling Holder agrees not to effect any sale or
distribution, including any sale under Rule 144, of any equity security of the
Issuer (otherwise than through the registered public offering then being
made), within 10 days prior to or 90 days (or such lesser period as the lead or
managing underwriters may permit) after the effective date of the applicable
registration statement.
ARTICLE 3
Miscellaneous
Section 3.1. Entire Agreement. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
Section 3.2. Assignment. No party may assign any of its
rights or obligations hereunder by operation of law or otherwise without the
prior written consent of the other parties.
Section 3.3. Amendments, Waivers, Etc. This Agreement may not
be amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by the
Issuer and Holders representing a majority of the Registrable Securities then
held by all Holders.
Section 3.4. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if given) by hand delivery or
telecopy, or by any courier service, such as Federal Express, providing proof
of delivery. All communications hereunder shall be delivered to the respective
parties at the address or telecopy number set forth on the signature pages
hereto or such other address or telecopy number as such party may hereafter
specify for the purpose by notice to the other parties hereto.
Section 3.5. Severability. Whenever possible, each provision
or portion of any provision of this Agreement will be interpreted in such
manner as to be effective and valid under applicable law but if any provision
or portion of any provision of this Agreement is held to be invalid, illegal
or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision
had never been contained herein.
Section 3.6. No Waiver. The failure of any party hereto to
exercise any right, power or remedy provided under this Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon compliance
by any other party hereto with its obligations hereunder, and any custom or
practice of the parties at variance with the terms hereof, shall not
constitute a waiver by such party of its right to exercise any such or other
right, power or remedy or to demand such compliance.
Section 3.7. No Third Party Beneficiaries. This Agreement is
not intended to be for the benefit of, and shall not be enforceable by, any
Person who or which is not a party hereto.
Section 3.8. Governing Law. This Agreement shall be governed
and construed in accordance with the laws of the State of Delaware, without
giving effect to the principles of conflicts of law thereof.
Section 3.9. Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or
in connection with, this Agreement or the transactions contemplated by this
Agreement may be brought against any of the parties in any federal court
located in the State of Delaware or any Delaware state court, and each of the
parties hereto hereby consents to the exclusive jurisdiction of such courts
(and of the appropriate appellate courts therefrom) in any such suit, action
or proceeding and waives any objection to venue laid therein. Process in any
such suit, action or proceeding may be served on any party anywhere in the
world, whether within or without the State of Delaware.
Section 3.10. Descriptive Headings. The descriptive headings
used herein are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement.
Section 3.11. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of
which, taken together, shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the Issuer and the Holders have caused this
Agreement to be duly executed as of the day and year first above written.
CVS CORPORATION
By:
--------------------------------
Name: Thomas M. Ryan
Title: Vice Chairman and Chief
Operating Officer
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Fax: (401) 762-3012
Attention: Thomas M. Ryan, Vice
Chairman and Chief
Operating Officer
INVESTORS
Class of Shares EUGENE APPLEBAUM LIVING TRUST
Stock Owned
- -----------------------
common 13,275,555 By:
------------------------------------------
Name: Eugene Applebaum
Title: Trustee
Class of Shares
Stock Owned
- -----------------------
common 265,780
------------------------------------------
Marcia C. Applebaum
Class of Shares TRUST FOR THE BENEFIT OF
Stock Owned LISA S. APPLEBAUM
- -----------------------
common 493,593 By:
------------------------------------------
Name: Marcia Applebaum
Title: Trustee
Class of Shares TRUST FOR THE BENEFIT OF
Stock Owned PAMELA A. APPLEBAUM
- -----------------------
common 493,593 By:
------------------------------------------
Name: Marcia Applebaum
Title: Trustee
Investor notices shall be given to:
Honigman Miller Schwartz and Cohn
2290 First National Building
Detroit, Michigan 48226
Fax: (313) 962-0176
Attention: Alan S. Schwartz, Esq.
SCHEDULE I
INVESTORS
---------
Class of Shares Eugene Applebaum Living Trust
Stock Owned
- -----------------------
common 13,275,555
Class of Shares Marcia C. Applebaum
Stock Owned
- -----------------------
common 265,780
Class of Shares Trust for the Benefit of
Stock Owned Lisa S. Applebaum
- -----------------------
common 493,593
Class of Shares Trust for the Benefit of
Stock Owned Pamela A. Applebaum
- -----------------------
common 493,593
Exhibit 4.5
EXECUTION COPY
Amendment No. 1 to Registration Rights Agreement
Amendment No. 1 dated as of April 20, 1998 between CVS
Corporation (the "Company") and Eugene Applebaum.
WHEREAS, pursuant to Section 2.01 of the Registration Rights
Agreement (the "Registration Rights Agreement") dated as of March 31, 1998,
among the Company and each of the Investors (as defined therein), one or more
Holders (as defined therein) have the right to demand the registration by the
Company under the Securities Act of 1933, as amended, of any or all of the
Registrable Securities (as defined therein) held by such requesting Holder;
WHEREAS, on March 31, 1998, Eugene Applebaum delivered a demand
for registration (the "March 1998 Demand") pursuant to Section 2.01 of the
Registration Rights Agreement;
WHEREAS, pursuant to Section 2.01, the Company is required to
prepare and file with the Securities and Exchange Commission a registration
statement covering the Registrable Securities specified in such demand (the
"First Registration Statement") by April 20, 1998;
WHEREAS, the parties desire to waive the Issuer's obligation to
file by April 20, 1998 the First Registration Statement;
NOW, THEREFORE, the Company and the undersigned hereby agree as
follows:
1. The Issuer's obligation to prepare and file the First
Registration Statement on or before April 20, 1998 is waived;
2. The Company acknowledges that the March 1998 Request has
been withdrawn by the Holders. The Company agrees that the withdrawn March
1998 Request will not be treated as a Demand Request or Demand Registration
for purposes of Section 2.01(a)(i) or 2.01(a)(iii) of the Registration Rights
Agreement, without prejudice to the Company's right to so treat any future
Demand Request.
3. Section 2.01(a) of the Registration Rights Agreement is
hereby amended by replacing the reference to "(or 20 days in the case of the
first such request)" contained therein with the following:
"(or in the case of the first such request, (x) within 3
business days, so long as (1) that request is delivered before noon E.S.T. on
May 5, 1998 and (2) the Holders, their financial advisors and their respective
counsel request only minor changes, if any, to the First Registration
Statement from the form distributed to the Holders and their advisors and
counsel on April 17, 1998 or (y) otherwise within twenty days or such shorter
period as the Company is reasonably capable of achieving without undue
burden)".
4. Section 2.01(b) of the Registration Rights Agreement is
hereby amended by inserting the following between "under the 1933 Act" and "or
if such" on the sixth line of such subsection: "(other than as a result of the
request of Holders)".
5. The remaining terms of the Registration Rights Agreement
shall remain unchanged, and the Registration Rights as amended hereby shall
remain in full force and effect.
6. This amendment shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the undersigned has duly executed this
amendment as of the day and year first above written.
CVS CORPORATION
By /s/ Douglas A. Sgarro
----------------------------
Name: Douglas A. Sgarro
Title: Vice President
INVESTORS
By /s/ Eugene Applebaum
----------------------------
Eugene Applebaum, on
behalf of the Investors
EXHIBIT 5.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
212-450-4000
May 14, 1998
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Ladies and Gentlemen:
We have acted as counsel to CVS Corporation ("CVS") in
connection with CVS' Registration Statement on Form S-3 (the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
registration of shares (the "Shares") of common stock, par value $.01 per
share, of CVS to be sold by certain stockholders of CVS.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates and other instruments, and have conducted such other
investigations of fact and law, as we have deemed necessary or advisable for
the purposes of this opinion.
On the basis of the foregoing, we are of the opinion that the
Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York, the federal
laws of the United States of America and the General Corporation Law of the
State of Delaware.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. In addition, we consent to the reference to us
under the caption "Validity of Common Stock" in the Prospectus constituting a
part of the Registration Statement.
Very truly yours,
/s/ DAVIS POLK & WARDWELL
--------------------------
EXHIBIT 15.1
[Letterhead of KPMG PEAT MARWICK LLP]
CVS Corporation
Woonsocket, RI 02895
Board of Directors:
Re: Registration Statement No. 333-52055
With respect to the subject Registration Statement, we
acknowledge our awareness of the use therein of our report dated April 30,
1998 related to our reviews of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered part of a registration statement prepared or
certified by any 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
May 13, 1998
EXHIBIT 23.1
[KPMG Peat Marwick Letterhead LLP]
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
CVS Corporation
We hereby consent to the use of our audit reports dated
February 9, 1998 on the consolidated financial statements of CVS Corporation
and subsidiaries as of December 31, 1997 and 1996, and for each of the years
in the three-year period then ended, such reports appearing and incorporated
by reference in the Annual Report on Form 10-K of CVS Corporation for the year
ended December 31, 1997, incorporated by reference in this Registration
Statement on Form S-3.
We consent to the reference to our firm under the headings
"Selected Historical Consolidated Financial and Operating Data" and "Experts"
in this Registration Statement on Form S-3.
/s/ KPMG PEAT MARWICK LLP
- --------------------------------
KPMG PEAT MARWICK LLP
Providence, Rhode Island
May 13, 1998
