<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
April 1, 2000 001-01011
CVS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 05-0494040
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ONE CVS DRIVE, WOONSOCKET, RHODE ISLAND 02895
---------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Telephone: (401) 765-1500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Common Stock, $0.01 par value, issued and outstanding at May 8, 2000:
390,182,560 shares
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<PAGE>
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INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
13 Weeks Ended April 1, 2000 and March 27, 1999 3
Consolidated Condensed Balance Sheets -
As of April 1, 2000 and January 1, 2000 4
Consolidated Condensed Statements of Cash Flows -
13 Weeks Ended April 1, 2000 and March 27, 1999 5
Notes to Consolidated Condensed Financial Statements 6
Independent Auditors' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 16
</TABLE>
2
<PAGE>
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
APRIL 1, March 27,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999
- ------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Net sales $ 4,739.5 $ 4,240.5
Cost of goods sold, buying and warehousing costs 3,439.5 3,071.1
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Gross margin 1,300.0 1,169.4
Selling, general and administrative expenses 893.3 808.2
Depreciation and amortization 71.8 68.0
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Total operating expenses 965.1 876.2
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Operating profit 334.9 293.2
Interest expense, net 16.1 14.3
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Earnings before income tax provision 318.8 278.9
Income tax provision 127.5 114.3
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Net earnings 191.3 164.6
Preference dividends, net of income tax benefit 3.8 3.6
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Net earnings available to common shareholders $ 187.5 $ 161.0
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BASIC EARNINGS PER COMMON SHARE:
Net earnings $ 0.48 $ 0.41
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Weighted average basic common shares outstanding 391.1 390.5
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DILUTED EARNINGS PER COMMON SHARE:
Net earnings $ 0.47 $ 0.40
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Weighted average diluted common shares outstanding 407.1 408.2
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DIVIDENDS DECLARED PER COMMON SHARE $ 0.0575 $ 0.0575
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
APRIL 1, January 1,
IN MILLIONS, EXCEPT SHARE AMOUNTS 2000 2000
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<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 236.6 $ 230.0
Accounts receivable, net 702.5 699.3
Inventories 3,658.3 3,445.5
Deferred income taxes 137.9 139.4
Other current assets 121.6 93.8
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TOTAL CURRENT ASSETS 4,856.9 4,608.0
Property and equipment, net 1,678.9 1,601.0
Goodwill, net 738.4 706.9
Other assets 416.8 359.5
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TOTAL ASSETS $ 7,691.0 $ 7,275.4
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LIABILITIES:
Accounts payable $ 1,284.1 $ 1,454.2
Accrued expenses 1,013.2 967.4
Short-term borrowings 922.8 451.0
Current portion of long-term debt 17.3 17.3
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TOTAL CURRENT LIABILITIES 3,237.4 2,889.9
Long-term debt 558.2 558.5
Deferred income taxes 23.0 27.2
Other long-term liabilities 121.5 120.1
SHAREHOLDERS' EQUITY:
Preference stock, series one ESOP convertible, par value $1.00:
authorized 50,000,000 shares; issued and outstanding 5,093,000 shares at
April 1, 2000 and 5,164,000 shares at January 1, 2000 272.2 276.0
Common stock, par value $0.01: authorized 1,000,000,000 shares; issued
403,396,000 shares at April 1, 2000 and 403,047,000 shares at January 1, 2000 4.0 4.0
Treasury stock, at cost: 14,156,000 shares at April 1, 2000 and 11,169,000
shares at January 1, 2000 (360.3) (258.5)
Guaranteed ESOP obligation (257.0) (257.0)
Capital surplus 1,379.9 1,371.7
Retained earnings 2,712.1 2,543.5
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TOTAL SHAREHOLDERS' EQUITY 3,750.9 3,679.7
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,691.0 $ 7,275.4
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
APRIL 1, March 27,
IN MILLIONS 2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 191.3 $ 164.6
Adjustments required to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 71.8 68.0
Deferred income taxes and other non-cash items 5.8 2.7
Change in assets and liabilities, excluding acquisitions and dispositions:
Increase in accounts receivable, net (3.2) (49.1)
Increase in inventories (212.8) (96.1)
(Increase) decrease in other current assets (28.5) 7.0
Increase in other assets (52.6) (61.2)
Decrease in accounts payable (170.1) (48.3)
Increase in accrued expenses 51.3 42.1
Increase (decrease) in other long-term liabilities 1.3 (15.2)
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (145.7) 14.5
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (140.5) (117.8)
Acquisitions, net of cash (55.6) (1.7)
Proceeds from sale or disposal of assets 3.1 25.5
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NET CASH USED IN INVESTING ACTIVITIES (193.0) (94.0)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to short-term borrowings 471.8 (248.7)
Proceeds from exercise of stock options 1.1 6.9
(Reductions in) additions to long-term debt (0.3) 299.8
Dividends paid (22.5) (22.5)
Purchase of treasury shares (104.8) --
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NET CASH PROVIDED BY FINANCING ACTIVITIES 345.3 35.5
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Net increase (decrease) in cash and cash equivalents 6.6 (44.0)
Cash and cash equivalents at beginning of period 230.0 180.8
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 236.6 $ 136.8
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
The accompanying consolidated condensed financial statements of CVS Corporation
("CVS" or the "Company") have been prepared without audit, in accordance with
the rules and regulations of the Securities and Exchange Commission. In
accordance with such rules and regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes that the disclosures included herein are adequate
to make the information presented not misleading. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 1, 2000.
In the opinion of management, the accompanying consolidated condensed financial
statements include all adjustments (consisting only of normal recurring
adjustments) which are necessary to present a fair statement of the Company's
results of operations for the interim periods presented. Because of the
influence of various factors on the Company's operations, including certain
holidays and other seasonal influences, net earnings for any interim period may
not be comparable to the same interim period in previous years or necessarily
indicative of earnings for the full fiscal year.
Certain reclassifications have been made to the consolidated condensed financial
statements of prior periods to conform to the current period presentation.
NOTE 2
The Company currently operates four business segments: Retail Pharmacy, Pharmacy
Benefit Management ("PBM"), Specialty Pharmacy and Internet Pharmacy. The
Company's business segments are operating units that offer different products
and services, and require distinct technology and marketing strategies.
The Retail Pharmacy segment, which includes 4,058 retail drugstores located in
24 states and the District of Columbia, operates under the CVS/pharmacy name.
The Retail Pharmacy segment is the Company's only reportable segment.
The PBM segment provides a full range of prescription benefit management
services to managed care providers and other organizations. These services
include plan design and administration, formulary management, mail order
pharmacy services, claims processing and generic substitution. The PBM segment
operates under the PharmaCare Management Services name.
The Specialty Pharmacy segment, which includes a mail order facility and 20
retail pharmacies located in 10 states and the District of Columbia, operates
under the CVS ProCare name. The Specialty Pharmacy segment focuses on supporting
individuals that require complex and expensive drug therapies.
The Internet Pharmacy segment, which includes a mail order facility and a
complete online retail pharmacy, operates under the CVS.com name.
The Company evaluates segment performance based on operating profit before the
effect of nonrecurring charges and gains and intersegment profits.
6
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a reconciliation of the Company's business segments to the
consolidated condensed financial statements as of and for the thirteen weeks
ended April 1, 2000 and March 27, 1999:
<TABLE>
<CAPTION>
- ------------------------------- -------------------- --------------------- -------------------- --------------------
Retail Pharmacy All Other Intersegment Consolidated
IN MILLIONS Segment Segments Eliminations(1) Totals
- ------------------------------- -------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
APRIL 1, 2000:
Net sales $ 4,585.9 $ 249.9 $ (96.3) $ 4,739.5
Operating profit 333.9 1.0 -- 334.9
March 27, 1999:
Net sales $ 4,148.4 $ 193.5 $ (101.4) $ 4,240.5
Operating profit 285.0 8.2 -- 293.2
- ------------------------------- -------------------- --------------------- -------------------- --------------------
Total assets:
APRIL 1, 2000 $ 7,488.0 $ 221.7 $ (18.7) $ 7,691.0
January 1, 2000 7,146.1 173.4 (44.1) 7,275.4
- ------------------------------- -------------------- --------------------- -------------------- --------------------
</TABLE>
(1) Intersegment eliminations relate to intersegment sales and accounts
receivables that occur when a PBM segment customer uses a Retail segment
store to purchase covered merchandise. When this occurs, both segments
record the sale on a stand-alone basis.
NOTE 3
Following are the components of net interest expense:
<TABLE>
<CAPTION>
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13 WEEKS ENDED
IN MILLIONS APRIL 1, 2000 March 27, 1999
- ------------------------------------------------------------------------- --------------------- --------------------
<S> <C> <C>
Interest expense $ 17.0 $ 16.1
Interest income (0.9) (1.8)
- ------------------------------------------------------------------------- --------------------- --------------------
Interest expense, net $ 16.1 $ 14.3
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</TABLE>
NOTE 4
Basic earnings per common share is computed by dividing: (i) net earnings, after
deducting the after-tax dividends on the ESOP preference Stock, by (ii) the
weighted average number of common shares outstanding during the period (the
"Basic Shares").
When computing diluted earnings per common share, the Company normally assumes
that the ESOP preference stock is converted into common stock and all dilutive
stock options are exercised. After the assumed ESOP preference stock conversion,
the ESOP Trust would hold common stock rather than ESOP preference stock and
would receive common stock dividends (currently $0.23 per share) rather than
ESOP preference stock dividends (currently $3.90 per share). Since the ESOP
Trust uses the dividends it receives to service its debt, the Company would have
to increase its contribution to the ESOP Trust to compensate it for the lower
dividends. This additional contribution would reduce the Company's net earnings,
which in turn, would reduce the amounts that would have to be accrued under the
Company's incentive compensation plans. Diluted earnings per common share is
computed by dividing: (i) net earnings, after accounting for the difference
between the dividends on the ESOP preference stock and common stock and after
making adjustments for the incentive compensation plans by (ii) Basic Shares
plus the additional shares that would be issued assuming that all dilutive stock
options are exercised and the ESOP preference stock is converted into common
stock.
7
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a reconciliation of basic and diluted earnings per common share for
the thirteen weeks ended:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------- ------------------ -----------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS APRIL 1, 2000 March 27, 1999
- ------------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
NUMERATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Net earnings $ 191.3 $ 164.6
Preference dividends, net of income tax benefit (3.8) (3.6)
- ------------------------------------------------------------------------------- ------------------ -----------------
Net earnings available to common shareholders, basic $ 187.5 $ 161.0
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Net earnings $ 191.3 $ 164.6
Effect of dilutive securities:
Dilutive earnings adjustments (0.1) 0.3
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Net earnings available to common shareholders, diluted $ 191.2 $ 164.9
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DENOMINATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Weighted average common shares, basic 391.1 390.5
Effect of dilutive securities:
ESOP preference stock 10.8 10.4
Stock options 5.2 7.3
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Weighted average common shares, diluted 407.1 408.2
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BASIC EARNINGS PER COMMON SHARE $ 0.48 $ 0.41
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DILUTED EARNINGS PER COMMON SHARE $ 0.47 $ 0.40
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</TABLE>
NOTE 5
On March 6, 2000, the Board of Directors approved a common stock repurchase
program to acquire up to $1 billion of the Company's common shares to fund
certain employee benefit plans. During the first quarter of 2000, the Company
repurchased 3.2 million shares of common stock at an aggregate cost of $104.8
million.
NOTE 6
In accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" and Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
recorded, during the second quarter of 1998, a $147.3 million charge to
operating expenses for direct and other merger-related costs pertaining to the
CVS/Arbor merger transaction and certain restructuring activities (the
"CVS/Arbor Charge"). The restructuring activities related to management's plan
to close Arbor's Troy, Michigan corporate headquarters, terminate Arbor's
corporate headquarters employees, and close certain store locations. Asset
write-offs included in this charge totaled $41.2 million. The balance of the
charge, $106.1 million, will require cash outlays of which $55.5 million had
been incurred as of April 1, 2000.
8
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a reconciliation of the beginning and ending liability balances
associated with the CVS/Arbor Charge as of April 1, 2000:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Exit Costs
--------------------------------------
Merger Employee Noncancelable
Transaction Severance Lease Asset Other Exit
IN MILLIONS Costs & Benefits(1) Obligations(2) Write-offs Costs Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CVS/Arbor Charge $ 15.0 $ 27.1 $ 40.0 $ 41.2 $ 24.0 $ 147.3
Utilization through 1/1/00 - cash (15.9) (16.8) (2.7) -- (19.7) (55.1)
Utilization through 1/1/00 - noncash -- -- -- (41.2) -- (41.2)
Transfer(3) 0.9 -- -- -- (0.9) --
- ------------------------------------------------------------------------------------------------------------------
Balance as of 1/1/00 $ -- $ 10.3 $ 37.3 $ -- $ 3.4 $ 51.0
2000 utilization - cash -- (0.2) (0.2) -- -- (0.4)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AS OF 4/1/00(4) $ -- $ 10.1 $ 37.1 $ -- $ 3.4 $ 50.6
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Employee severance extends through 2000. Employee benefits extend for a
number of years to coincide with the payment of excess parachute payment
excise taxes and related income tax gross-ups.
(2) Noncancelable lease obligations extend through 2020.
(3) The transfers between the components of the plan were recorded in the same
period that the changes in estimates were determined. These amounts are
considered to be immaterial.
(4) The Company believes that the reserve balances as of April 1, 2000 are
adequate to cover the remaining liabilities associated with the CVS/Arbor
Charge.
9
<PAGE>
PART I INDEPENDENT AUDITORS' REVIEW REPORT
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The Board of Directors and Shareholders of
CVS Corporation:
We have reviewed the consolidated condensed balance sheet of CVS Corporation as
of April 1, 2000, and the related consolidated condensed statements of
operations and cash flows for the thirteen-week periods ended April 1, 2000 and
March 27, 1999. These consolidated condensed financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of CVS Corporation as of January 1,
2000 and the related consolidated statements of operations, shareholders'
equity, and cash flows for the fifty-three week period ended January 1, 2000 and
the fifty-two week period ended December 26, 1998, (not presented herein); and
in our report dated February 7, 2000 we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated condensed balance sheet as of January 1,
2000, is fairly presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/S/ KPMG LLP
- -------------------------
KPMG LLP
Providence, Rhode Island
May 5, 2000
10
<PAGE>
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion explains the material changes in our results of
operations for the thirteen weeks ended April 1, 2000 and March 27, 1999 and the
significant developments affecting our financial condition since January 1,
2000. We strongly recommend that you read our audited consolidated financial
statements and footnotes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on Form 10-K
for the fiscal year ended January 1, 2000.
RESULTS OF OPERATIONS
NET SALES for the first quarter of 2000 increased $499.0 million (or 11.8%) to
$4.7 billion, compared to $4.2 billion in the first quarter of 1999. Same store
sales, consisting of sales from stores that have been open for more than one
year, rose 8.8%, while pharmacy same store sales increased 15.2%. Pharmacy sales
were 62% of total sales in the first quarter of 2000, compared to 59% in the
first quarter of 1999. Third party prescription sales were 88% of pharmacy sales
during the first quarter of 2000, compared to 85% in the first quarter of 1999.
As you review our sales performance, we believe you should consider the
following important information:
o Our pharmacy sales growth continued to benefit from our ability to
attract and retain managed care customers, our ongoing program of
purchasing prescription files from independent pharmacies and
favorable industry trends. These trends include an aging American
population; many "baby boomers" are now in their fifties and are
consuming a greater number of prescription drugs. The increased use of
pharmaceuticals as the first line of defense for healthcare and the
introduction of a number of successful new prescription drugs also
contributed to the growing demand for pharmacy services.
o Our front store sales growth was primarily driven by solid performance
in general merchandise, health and beauty, convenience foods and film
and photofinishing.
o Sales also benefited from our active relocation program which seeks to
move our existing shopping center stores to larger, more convenient,
freestanding locations. Historically, we have achieved significant
improvements in customer count and net sales when we do this. The
resulting increase in net sales has typically been driven by an
increase in front store sales, which normally have a higher gross
margin. We believe that our relocation program offers a significant
opportunity for future growth, as 34% of our existing stores are
freestanding at April 1, 2000. Our long-term goal is to have 70-80% of
our stores located in freestanding sites. We cannot, however,
guarantee that future store relocations will deliver the same results
as those historically achieved. Please read the "Cautionary Statement
Concerning Forward-Looking Statements" section below.
GROSS MARGIN for the first quarter of 2000 increased $130.6 million (or 11.2%)
to $1.3 billion, compared to $1.2 billion in the first quarter of 1999. Gross
margin as a percentage of net sales for the first quarter of 2000 was 27.4%,
compared to 27.6% of net sales in the first quarter of 1999.
Why has our gross margin rate been declining?
o Pharmacy sales are growing at a faster pace than front store sales. On
average, our gross margin on pharmacy sales is lower than our gross
margin on front store sales.
11
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Sales to customers covered by third party insurance programs have
continued to increase and, thus, have become a larger part of our
total pharmacy business. Our gross margin on third party sales has
continued to decline largely due to the efforts of managed care
organizations and other pharmacy benefit managers to reduce
prescription drug costs. To address this trend, we have dropped a
number of third party programs that fell below our minimum
profitability standards. In the event this trend continues and we
elect to drop additional programs and/or decide not to participate in
future programs that fall below our minimum profitability standards,
we may not be able to sustain our current rate of sales growth.
TOTAL OPERATING EXPENSES for the first quarter of 2000 were $965.1 million or
20.4% of net sales, compared to $876.2 million or 20.7% of net sales in the
first quarter of 1999.
What have we done to improve our total operating expenses as a percentage of net
sales?
o Our strong sales performance has consistently allowed net sales to
grow at a faster pace than total operating expenses.
o Our information technology initiatives have led to greater
productivity, which has resulted in lower operating costs,
particularly at the store level.
OPERATING PROFIT for the first quarter of 2000 increased $41.7 million (or
14.2%) to $334.9 million, compared to $293.2 million in the first quarter of
1999. Operating profit as a percentage of net sales was 7.1% in the first
quarter of 2000, compared to 6.9% in the first quarter of 1999.
INTEREST EXPENSE, NET for the first quarter of 2000 was $16.1 million, compared
to $14.3 million in the first quarter of 1999. Our interest expense totaled
$17.0 million in the first quarter of 2000, compared to $16.1 million in the
first quarter of 1999. Interest income was $0.9 million in the first quarter of
2000 versus $1.8 million in the first quarter of 1999. Our interest expense
increased due to a combination of higher interest rates and average borrowing
levels during the first quarter of 2000.
INCOME TAX PROVISION ~ Our effective tax rate was 40.0% for the first quarter of
2000, compared to 41.0% for the first quarter of 1999. The decrease in our
effective tax rate was primarily due to lower effective state income tax rates.
NET EARNINGS for the first quarter of 2000 increased $26.7 million (or 16.2%) to
$191.3 million, or $0.47 per diluted share, compared to $164.6 million, or $0.40
per diluted share, in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY ~ The Company has three primary sources of liquidity: cash provided by
operations, commercial paper and uncommitted lines of credit. We generally
finance our working capital and capital expenditure requirements with internally
generated funds and our commercial paper program. In addition, we may elect to
use additional long-term borrowings in the future to support our continued
growth.
Our commercial paper program is supported by a $670 million, five-year unsecured
revolving credit facility which expires on May 30, 2002 and a $530 million,
364-day unsecured revolving credit facility which expires on June 26, 2000.
During the second quarter of 2000, we expect to replace the $530 million credit
facility with a similar facility. The credit facilities contain customary
restrictive financial and operating covenants, none of which is expected to
materially affect our financial or operating flexibility. We can also obtain
short-term financing through various uncommitted lines of credit. As of April 1,
2000, we had $891.0 million of commercial paper outstanding at a weighted
average interest rate of 6.0% and $31.8 million outstanding under the
uncommitted lines of credit at a weighted average interest rate of 5.8%.
12
<PAGE>
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We believe that our cash on hand and cash provided by operations, together with
our ability to obtain additional short-term and long-term financing, will be
sufficient to cover our working capital needs, capital expenditures and debt
service requirements for at least the next twelve months.
On March 6, 2000, the Board of Directors approved a common stock repurchase
program to acquire up to $1 billion of the Company's common shares to fund
certain employee benefit plans. During the first quarter of 2000, the Company
repurchased 3.2 million shares of common stock at an aggregate cost of $104.8
million.
NET CASH USED IN OPERATIONS ~ Net cash used in operations increased $160.2
million to $145.7 million during the first quarter of 2000. This compares to net
cash provided by operations of $14.5 during the first quarter of 1999. The
increase in cash used in operations resulted primarily from higher inventory
levels and a decrease in accounts payable. As of April 1, 2000, the future cash
payments associated with various restructuring programs totaled $119.3 million.
These payments primarily include: (i) $11.4 million for employee severance,
which extends through 2000, (ii) $8.9 million for retirement benefits and
related excess parachute payment excise taxes, which extend for a number of
years to coincide with the payment of retirement benefits, and (iii) $95.6
million for continuing lease obligations, which extend through 2020.
CAPITAL EXPENDITURES ~ Our capital expenditures totaled $140.5 million in the
first quarter of 2000, compared to $117.8 million in the first quarter of 1999.
During the first quarter of 2000, we opened 29 new stores, relocated 58 stores
and closed 49 stores. As of April 1, 2000, we operated 4,078 stores in 27 states
and the District of Columbia, compared to 4,096 stores as of March 27, 1999.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS ~ Certain statements
in this Form 10-Q (as well as in other public filings, our web site, press
releases and oral statements made by Company management and/or representatives),
constitute forward-looking statements, which are subject to risks and
uncertainties. Forward-looking statements include information concerning:
o our future results of operations, including sales and earnings per
common share growth and cost savings and synergies following the Revco
and Arbor mergers;
o our planned store development, including store openings, number of
freestanding locations, new markets and capital expenditures;
o our belief that we have sufficient cash flows to support working
capital needs, capital expenditures and debt service requirements;
o our belief concerning the growth of our free cash flow;
o our belief that we can continue to improve operating performance by
relocating existing in-line stores to freestanding locations;
o our ability to continue to reduce selling, general and administrative
expenses as a percentage of net sales;
o our belief concerning the profitability of CVS.com;
o our belief concerning the growth of CVS ProCare sales and store
locations; and
o our belief that we can continue to reduce inventory levels and improve
inventory turnover.
In addition, statements that include the words "believes", "expects",
"anticipates", "intends", "estimates" or similar expressions are forward-looking
statements. For all of these statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
13
<PAGE>
PART I ITEM 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should understand that the following important factors, in addition to those
discussed elsewhere in this report and in the documents which are incorporated
by reference (and in our other public filings, press releases and oral
statements made by Company management and/or representatives), could cause
actual results to differ materially from those expressed in the forward-looking
statements:
WHAT FACTORS COULD AFFECT THE OUTCOME OF OUR FORWARD-LOOKING STATEMENTS?
INDUSTRY AND MARKET FACTORS
o changes in economic conditions generally or in the markets served by
CVS;
o future federal and/or state regulatory and legislative actions
affecting CVS and/or the chain drugstore industry;
o consumer preferences and spending patterns;
o competition from other drugstore chains, from alternative distribution
channels such as supermarkets, membership clubs, mail order companies
and internet companies (e-commerce) and from other third party plans;
o the continued efforts of health maintenance organizations, managed
care organizations, pharmacy benefit management companies and other
third party payers to reduce prescription drug costs; and
o changes in accounting policies and practices, including taxation
requirements.
OPERATING FACTORS
o our ability to implement new computer systems and technologies;
o our ability to continue to secure suitable new store locations on
favorable lease terms;
o the creditworthiness of the purchasers of former businesses whose
store leases are guaranteed by CVS;
o our ability to continue to purchase inventory on favorable terms;
o our ability to attract, hire and retain suitable pharmacists and
management personnel; and
o our ability to establish effective advertising, marketing and
promotional programs (including pricing strategies) in the different
geographic markets in which we operate.
14
<PAGE>
PART I ITEM 3
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments, principally interest
rate risk inherent in its debt portfolio, is not material.
15
<PAGE>
PART II ITEM 6
- --------------------------------------------------------------------------------
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to CVS Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
3.1A Certificate of Amendment to the Amended and Restated Certificate of
Incorporation, effective May 13, 1998 (incorporated by reference to
Exhibit 4.1A to Registrant's Registration Statement No. 333-52055 on
Form S-3/A dated May 18, 1998).
3.2 By-laws of the Registrant, as amended and restated (incorporated by
reference to Exhibit 3.2 to CVS Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1998).
15.1 Letter re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule - April 1, 2000.
REPORTS ON FORM 8-K:
On March 14, 2000, we filed a Current Report on Form 8-K to correct our issued
and outstanding common share balance included in the Proxy Statement for the
2000 Annual Meeting of Stockholders.
On March 8, 2000, we filed a Current Report on Form 8-K to announce the
authorization by the Board of Directors of a common stock repurchase program.
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
CVS Corporation
(REGISTRANT)
/S/ DAVID B. RICKARD
- ------------------------------
David B. Rickard
Executive Vice President
and Chief Financial Officer
May 15, 2000
16
<PAGE>
PART II EXHIBIT 15.1
- -------------------------------------------------------------------------------
LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
CVS Corporation
Woonsocket, Rhode Island
Board of Directors:
Re: Registration Statements Numbers 333-49407, 33-40251, 333-34927, 333-28043,
33-17181, 2-97913, 2-77397 and 2-53766 on Form S-8 and 333-52055 on
Form S-3
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated May 5, 2000, related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/S/ KPMG LLP
- -------------------------
KPMG LLP
Providence, Rhode Island
May 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheet and the consolidated condensed statement of
operations as of and for the three months ended April 1, 2000 and is qualified
in its entirety by reference to such financial statements.
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<S> <C>
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<FISCAL-YEAR-END> DEC-30-1999
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<INVENTORY> 3,658,300
<CURRENT-ASSETS> 4,856,900
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<TOTAL-ASSETS> 7,691,000
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0
272,200
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<CGS> 3,439,500
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<OTHER-EXPENSES> 965,100
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