-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LgepAPWn4FdmDi7AdVE/2FzAfNtwSSucbUmoGcE4ToqYxuW5o+QBTXBILkyVQahM L+JxjIvur0TQ1kWTmpZuEg== 0000950135-97-003302.txt : 19970811 0000950135-97-003302.hdr.sgml : 19970811 ACCESSION NUMBER: 0000950135-97-003302 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970808 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CVS CORP CENTRAL INDEX KEY: 0000064803 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 050494040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01011 FILM NUMBER: 97654618 BUSINESS ADDRESS: STREET 1: ONE CVS DR CITY: WOONSOCKET STATE: RI ZIP: 02895 BUSINESS PHONE: 9149254000 MAIL ADDRESS: STREET 1: ONE THEALL ROAD CITY: RYE STATE: NY ZIP: 10580 FORMER COMPANY: FORMER CONFORMED NAME: MELVILLE CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MELVILLE SHOE CORP DATE OF NAME CHANGE: 19760630 10-Q 1 CVS/PHARMACY 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 - -------------------------------------------------------------------------------- For the Quarterly Period Ended Commission File Number June 28, 1997 1-1011 CVS CORPORATION (Exact name of registrant as specified in its charter) Delaware 05-0494040 (State of Incorporation) (I.R.S. Employer Identification Number) One CVS Drive, Woonsocket, Rhode Island 02865 (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, $.01 par value, outstanding at August 6, 1997: 171,987,333 shares ================================================================================ 2 INDEX ================================================================================ PAGE PART I Item 1. Financial Statements Consolidated Condensed Statements of Operations - Three and Six Months Ended June 28, 1997 and June 29, 1996 3 Consolidated Condensed Balance Sheets - As of June 28, 1997 and December 31, 1996 4 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 28, 1997 and June 29, 1996 5 Notes to Consolidated Condensed Financial Statements 6 Independent Accountants' Review Report 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20 2 3 Part I Item 1 ================================================================================ CVS CORPORATION Consolidated Condensed Statements of Operations (Unaudited)
Three Months Ended Six Months Ended ============================================================================================================= JUNE 28, June 29, JUNE 28, June 29, In millions, except per share amounts 1997 1996 1997 1996 ============================================================================================================= Net sales $ 3,160.6 $ 2,674.7 $ 6,321.5 $ 5,232.9 Cost of goods sold, buying and warehousing costs 2,354.2 1,919.7 4,615.0 3,742.0 - ------------------------------------------------------------------------------------------------------------- Gross margin 806.4 755.0 1,706.5 1,490.9 Selling, general and administrative expenses 645.9 553.6 1,300.4 1,098.0 Depreciation and amortization 54.8 47.2 108.3 93.7 Non-recurring charge 411.7 12.8 442.7 12.8 - ------------------------------------------------------------------------------------------------------------- Total operating expenses 1,112.4 613.6 1,851.4 1,204.5 - ------------------------------------------------------------------------------------------------------------- Operating (loss) profit (306.0) 141.4 (144.9) 286.4 Gain on sale of securities -- 76.6 -- 76.6 Dividend income -- 2.7 -- 5.5 Interest expense, net (16.5) (24.7) (29.3) (44.3) - ------------------------------------------------------------------------------------------------------------- Other (expense) income, net (16.5) 54.6 (29.3) 37.8 - ------------------------------------------------------------------------------------------------------------- (Loss) earnings from continuing operations before (322.5) 196.0 (174.2) 324.2 income taxes and extraordinary item Income tax (benefit) provision (91.7) 81.8 (26.1) 137.7 - ------------------------------------------------------------------------------------------------------------- (Loss) earnings from continuing operations before extraordinary item (230.8) 114.2 (148.1) 186.5 Discontinued operations: Loss from operations, net of income tax benefits of $13.5 and $17.5 in 1996 -- (28.8) -- (54.8) Estimated income (loss) on disposal, net of income tax provisions of $12.4 in 1997 and $69.9 and $70.5 in 1996 17.4 (124.7) 17.5 (124.9) - ------------------------------------------------------------------------------------------------------------- Earnings (loss) from discontinued operations 17.4 (153.5) 17.5 (179.7) Net (loss) earnings before extraordinary item (213.4) (39.3) (130.6) 6.8 Extraordinary item, loss related to early retirement of debt, net of tax benefit of $11.4 (17.1) -- (17.1) -- - ------------------------------------------------------------------------------------------------------------- Net (loss) earnings (230.5) (39.3) (147.7) 6.8 Preferred dividends, net (3.4) (3.6) (6.8) (7.2) - ------------------------------------------------------------------------------------------------------------- Net (loss) earnings available to common shareholders $ (233.9) $ (42.9) $ (154.5) $ (.4) ============================================================================================================= PER COMMON SHARE: (Loss) earnings from continuing operations before extraordinary item $ (1.37) $ .66 $ (.91) $ 1.08 Earnings (loss) from discontinued operations .10 (.92) .10 (1.08) Extraordinary item, net of tax (.10) -- (.10) -- - ------------------------------------------------------------------------------------------------------------- Net (loss) earnings $ (1.37) $ (.26) $ (.91) $ -- ============================================================================================================= Weighted average common shares outstanding 167.9 166.2 167.3 164.9 ============================================================================================================= Dividends declared per common share $ .11 $ .11 $ .22 $ .22 =============================================================================================================
See accompanying notes to consolidated condensed financial statements. 3 4 Part I Item 1 ================================================================================ CVS CORPORATION Consolidated Condensed Balance Sheets
JUNE 28, 1997 December 31, In millions, except per share amounts (UNAUDITED) 1996 ============================================================================================================================ ASSETS: Cash and cash equivalents $ 74.9 $ 471.8 Investments 4.1 181.4 Accounts receivable, net 379.5 350.7 Inventories 2,346.8 2,328.2 Other current assets 374.9 196.8 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 3,180.2 3,528.9 Property and equipment, net 1,022.6 1,024.5 Deferred charges and other assets 281.1 223.8 Goodwill, net 712.1 721.7 Reorganization value in excess of amounts allocated to identifiable assets 114.9 194.8 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $5,310.9 $5,693.7 ============================================================================================================================ LIABILITIES: Accounts payable $ 918.2 $1,046.3 Accrued expenses 1,394.4 1,007.1 Federal income taxes 23.4 24.5 Other current liabilities 18.0 44.9 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,354.0 2,122.8 Long-term debt 591.7 1,184.3 Deferred income taxes 54.9 49.4 Other long-term liabilities 163.6 140.8 SHAREHOLDERS' EQUITY: Preference stock; par value $1.00, 50 shares authorized; Series One ESOP Convertible, liquidation value $53.45; 5.4 and 5.6 shares issued and outstanding at June 28, 1997 and December 31, 1996, respectively 286.3 298.6 Common stock; par value $.01, 300 shares authorized, 175.4 and 172.2 shares issued at June 28, 1997 and December 31, 1996, respectively 1.7 1.7 Treasury stock at cost; 5.6 and 5.8 shares at June 28, 1997 and December 31, 1996, respectively (262.5) (273.1) Guaranteed ESOP obligation (295.8) (292.1) Capital surplus 983.3 875.9 Retained earnings 1,433.7 1,587.8 Other -- (2.4) - ---------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 2,146.7 2,196.4 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,310.9 $5,693.7 ============================================================================================================================
See accompanying notes to consolidated condensed financial statements. 4 5 Part I Item 1 ================================================================================ CVS CORPORATION Consolidated Condensed Statements of Cash Flows (Unaudited)
Six Months Ended JUNE 28, June 29, In millions 1997 1996 ======================================================================================================================== NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (33.3) $ 109.4 ======================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (99.2) (143.6) Proceeds from sale of investments 247.1 191.6 Proceeds from sale or disposal of assets 12.1 201.3 - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY INVESTING ACTIVITIES 160.0 249.3 ======================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in notes payable (592.9) (144.2) Decrease in book overdrafts (39.3) (197.0) Dividends paid (23.6) (87.1) Proceeds from stock options exercised 132.2 15.2 - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (523.6) (413.1) ======================================================================================================================== Net decrease in cash and cash equivalents (396.9) (54.4) Cash and cash equivalents at beginning of period 471.8 145.2 - ------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74.9 $ 90.8 ========================================================================================================================
See accompanying notes to consolidated condensed financial statements. 5 6 Part I Item 1 ================================================================================ CVS CORPORATION Notes to Consolidated Condensed Financial Statements (Unaudited) NOTE 1 On May 29, 1997, CVS Corporation ("CVS") completed a merger with Revco D.S., Inc. ("Revco"), hereafter collectively referred to as the Company, by exchanging approximately 60.3 million shares of its common stock for all of the outstanding common stock of Revco (the "Merger"). Each outstanding share of Revco common stock was exchanged for .8842 shares of CVS common stock. In addition, outstanding Revco employee stock options were converted at the same exchange ratio into options to purchase approximately 3.3 million shares of CVS common stock. The Merger, which constituted a tax-free reorganization, has been accounted for as a pooling of interests under Accounting Principles Board ("APB") Opinion No. 16, "Accounting for Business Combinations." Accordingly, all prior period financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Revco as if it had always been part of CVS. Pursuant to an agreement with the Federal Trade Commission, the Company is required to divest 120 Revco stores, primarily in the Richmond, Virginia area. At June 30, 1997, 114 of the stores had been divested. Following is a summary of the results of operations for the separate companies and the combined amounts presented in the consolidated condensed financial statements:
===================================================================== Three Months Ended March 29, March 30, In millions 1997 1996 --------------------------------------------------------------------- Net sales: CVS $1,515.0 $1,258.4 Revco 1,645.8 1,299.8 --------------------------------------------------------------------- $3,160.8 $2,558.2 ===================================================================== Earnings from continuing operations before extraordinary item: CVS $ 58.4 $ 40.5 Revco 24.2 31.8 --------------------------------------------------------------------- $ 82.6 $ 72.3 =====================================================================
In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," the Company recorded a charge to operating expenses of $411.7 million in the second quarter of 1997 for direct and other merger-related costs pertaining to the merger transaction and certain restructuring programs. Following is a summary of the significant components of the charge:
============================================================= In millions ------------------------------------------------------------- Merger transaction costs $ 35.0 Restructuring costs: Employee severance 89.8 Exit costs 286.9 ------------------------------------------------------------- $411.7 =============================================================
6 7 Part I Item 1 ================================================================================ CVS CORPORATION Notes to Consolidated Condensed Financial Statements (Unaudited) Merger transaction costs primarily include fees for investment bankers, attorneys, accountants, financial printing and other related charges. Restructuring activities primarily relate to the consolidation of administrative functions. These actions will result in the reduction of approximately 1,000 employees, primarily in Revco's Twinsburg, Ohio Headquarters, through the consolidation and closure of certain facilities. Exit costs primarily relate to activities such as the cancellation of lease agreements, closing of stores and the write-down of unutilized fixed assets. Asset write-offs included in the above charge totaled $53.7 million. The balance of the pre-tax charge, $358.0 million, will require cash outlays, primarily in 1997 and 1998. The Company also recorded a charge to cost of goods sold of approximately $75 million in the second quarter of 1997 to reflect markdowns on non-compatible merchandise. NOTE 2 The accompanying consolidated condensed financial statements have been prepared without audit, in accordance with the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with (i) the consolidated financial statements and notes thereto included in CVS Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 and (ii) the supplemental consolidated financial statements as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, as restated for the merger of CVS and Revco, included in the Company's Current Report on Form 8-K filed on July 17, 1997 (as amended by the Company's Current Report on Form 8-K/A filed on July 23, 1997). These supplemental consolidated financial statements become the Company's historical consolidated financial statements commensurate with the filing of this Form 10-Q. 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 results for the interim periods presented. Because of the influence of certain holidays, seasonal and other factors on the Company's operations, net earnings for any interim period may not be comparable to the same interim period in previous years, nor necessarily indicative of earnings for the full year. NOTE 3 During the first quarter of 1997, the Company recorded a charge to operating expenses of $31.0 million for certain non-capitalizable costs associated with the restructuring of Big B, Inc., which the Company acquired in 1996. The significant components of the charge included: $5.3 million for store, distribution and MIS conversion costs, $18.7 million for store closing costs and $7.0 million for duplicate headquarters and administration costs. In accordance with EITF 94-3, this charge includes accrued liabilities related to certain exit plans for identified stores and duplicate corporate facilities. The charge primarily includes costs related to activities such as the cancellation of lease agreements and the write-down of unutilized fixed assets. These exit plans do not benefit the future activities of the retained stores or corporate facilities. 7 8 Part I Item 1 ================================================================================ CVS CORPORATION Notes to Consolidated Condensed Financial Statements (Unaudited) NOTE 4 On May 30, 1997, the Company repaid $600 million of bank debt outstanding under its bank facility which was subsequently terminated (the "Bank Facility Repayment"). In June 1997, the Company redeemed $144.9 million aggregate principal amount of its 10.125% Senior Notes (the "Debt Redemption") at 105% of the principal amount thereof plus accrued interest. In addition, on June 25, 1997, the Company commenced an offer (the "Debt Tender Offer") to purchase for cash $140.0 million aggregate principal amount of its 9.125% Senior Notes under which $118.8 million aggregate principle amount of the 9.125% Senior Notes were repurchased at an average price of 104.72% principle amount plus accrued interest. The Company expects to redeem the remaining 9.125% Senior Notes outstanding on January 15, 1998, the first redemption date, at 103% of principal plus accrued interest. The Bank Facility Repayment, Debt Redemption and Debt Tender Offer (collectively, the "Revco Debt Retirement") were financed with cash on hand and borrowings through the Company's commercial paper program. As a result of the Revco Debt Retirement, the Company recorded an after-tax charge of $17.1 million in the second quarter of 1997. This charge, which includes early retirement premiums and the write-off of unamortized finance costs, has been classified as an extraordinary item in the accompanying consolidated condensed statements of operations. NOTE 5 Discontinued operations accounted for approximately 2.7% and 2.5% of total assets and approximately 1.6% and 1.8% of total liabilities at June 28, 1997 and December 31, 1996, respectively. Net sales from discontinued operations totaled $179.9 million and $1.7 billion for the six months ended June 28, 1997 and June 29, 1996, respectively. NOTE 6 Primary earnings per share is computed by dividing (i) net earnings, after deducting net dividends on redeemable preferred stock and ESOP Preference Stock ("Primary Earnings"), by (ii) the weighted average number of common shares outstanding during the period assuming the exercise of stock options ("Primary Shares"). Fully diluted earnings per share assumes that the ESOP preference stock is converted into common stock. Fully diluted earnings per share is computed by dividing (i) Primary Earnings, after accounting for the difference between the current dividends on the ESOP preference stock and the common stock and after making adjustments for certain non-discretionary expenses that are based on net earnings such as incentive bonuses and profit sharing by (ii) Primary Shares plus the number of additional common shares that would be issued upon the conversion of the ESOP preference stock. Fully diluted earnings per share presentation is not required on the face of the consolidated statements of operations due to the results of the materiality tests mandated by Accounting Principles Board Opinion No. 15, "Earnings Per Share." 8 9 Part I Item 1 ================================================================================ CVS CORPORATION Notes to Consolidated Condensed Financial Statements (Unaudited) The Company plans to adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" during the fourth quarter of 1997. SFAS No. 128 was issued in February 1997 and is effective for periods ending after December 15, 1997. This standard requires the dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. It also requires a reconciliation of the computation between basic and diluted earnings per share. Earlier adoption of this statement is not permitted for comparability reasons. The Company does not expect basic earnings per share to be materially different from primary earnings per share. NOTE 7 Following are the components of net interest expense:
========================================================================================================= Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, In millions 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------- Interest expense $(25.1) $(24.8) $(44.4) $(46.0) Interest income 8.6 .1 15.1 1.7 - --------------------------------------------------------------------------------------------------------- Interest expense, net $(16.5) $(24.7) $(29.3) $(44.3) =========================================================================================================
9 10 Part I Independent Accountants' Review Report ================================================================================ The Board of Directors and Shareholders of CVS Corporation: We have reviewed the consolidated condensed balance sheets of CVS Corporation as of June 28, 1997 and June 29, 1996, and the related consolidated condensed statements of operations for the three and six month periods then ended and cash flows for the six months then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of CVS Corporation as of December 31, 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated July 16, 1997, based on our audit and the report of the other auditors, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG Peat Marwick LLP - -------------------------------- KPMG Peat Marwick LLP Providence, Rhode Island July 30, 1997 10 11 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations MERGER On May 29, 1997, CVS Corporation ("CVS") completed a merger with Revco D.S., Inc. ("Revco"), hereafter collectively referred to as the Company, by exchanging approximately 60.3 million shares of its common stock for all of the outstanding common stock of Revco (the "Merger"). Each outstanding share of Revco common stock was exchanged for .8842 shares of CVS common stock. In addition, outstanding Revco employee stock options were converted at the same exchange ratio into options to purchase approximately 3.3 million shares of CVS common stock. The Merger, which constituted a tax-free reorganization, has been accounted for as a pooling of interests under Accounting Principles Board ("APB") Opinion No. 16, "Accounting for Business Combinations." Accordingly, all prior period financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Revco as if it had always been part of CVS. Pursuant to an agreement with the Federal Trade Commission, the Company is required to divest 120 Revco stores, primarily in the Richmond, Virginia area. At June 30, 1997, 114 of the stores had been divested. Following is a summary of the results of operations for the separate companies and the combined amounts presented in the consolidated condensed financial statements:
========================================================================= Three Months Ended March 29, March 30, In millions 1997 1996 ------------------------------------------------------------------------- Net sales: CVS $1,515.0 $1,258.4 Revco 1,645.8 1,299.8 ------------------------------------------------------------------------- $3,160.8 $2,558.2 ========================================================================= Earnings from continuing operations before extraordinary item: CVS $ 58.4 $ 40.5 Revco 24.2 31.8 ------------------------------------------------------------------------- $ 82.6 $ 72.3 =========================================================================
In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," the Company recorded a charge to operating expenses of $411.7 million in the second quarter of 1997 for direct and other merger-related costs pertaining to the merger transaction and certain restructuring programs (the "Revco Restructuring Charge"). Following is a summary of the significant components of the charge:
=================================================================== In millions ------------------------------------------------------------------- Merger transaction costs $ 35.0 Restructuring costs: Employee severance 89.8 Exit costs 286.9 ------------------------------------------------------------------- $ 411.7 ===================================================================
11 12 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Merger transaction costs primarily include fees for investment bankers, attorneys, accountants, financial printing and other related charges. Restructuring activities primarily relate to the consolidation of administrative functions. These actions will result in the reduction of approximately 1,000 employees, primarily in Revco's Twinsburg, Ohio Headquarters, through the consolidation and closure of certain facilities. Exit costs primarily relate to activities such as the cancellation of lease agreements, closing of stores and the write-down of unutilized fixed assets. Asset write-offs included in the above charge totaled $53.7 million. The balance of the pre-tax charge, $358.0 million, will require cash outlays, primarily in 1997 and 1998. The Company also recorded a charge to cost of goods sold of approximately $75 million in the second quarter of 1997 to reflect markdowns on non-compatible merchandise. RESULTS OF OPERATIONS The following discussion explains material changes in the results of operations of the Company for the three and six months ended and June 28, 1997. This discussion should be read in conjunction with (i) the consolidated financial statements and notes thereto included in CVS Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 and (ii) the supplemental consolidated financial statements as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, together with the related supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations, in each case as restated for the merger of CVS and Revco, included in the Company's Current Report on Form 8-K filed on July 17, 1997 (as amended by the Company's Current Report on Form 8-K/A filed on July 23, 1997). The results of operations of the Company's former footwear segment, apparel segment and toys and home furnishings segment have been classified as discontinued operations in the accompanying consolidated condensed statements of operations for all periods presented. The following management discussion focuses primarily on continuing operations. SECOND QUARTER NET SALES for the second quarter of 1997 increased $485.9 million or 18.2% to $3.2 billion, compared to net sales of $2.7 billion for the second quarter of 1996. Same store sales, consisting of sales from stores that have been open for more than one year, rose 9.0%, with pharmacy same store sales increasing 16.8%. Pharmacy sales were 53.8% of total sales in 1997, compared to 51.5% in 1996. GROSS MARGIN for the second quarter of 1997 increased $51.4 million or 6.8% to $806.4 million, compared to $755.0 million for the second quarter of 1996. It is important to note that 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 $126.4 million or 16.7% to $881.4 million. The increase in gross margin dollars was primarily due to the increase in net sales for the quarter. 12 13 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Gross margin as a percentage of net sales for the second quarter of 1997 was 25.5%, compared to 28.2% for the second quarter of 1996. Excluding the effect of the Revco Inventory Markdown, gross margin as a percentage of net sales for the second quarter of 1997 was 27.9%. The 30 basis point decline in 1997 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. TOTAL OPERATING EXPENSES for the second quarter of 1997 were $1.1 billion or 35.2% of net sales, compared to $613.6 million or 22.9% of net sales for the second quarter of 1996. As discussed above, during the second quarter of 1997 the Company recorded the Revco Restructuring Charge of $411.7 million. Excluding the effect of the Revco Restructuring Charge, comparable operating expenses were $700.7 million or 22.2% of net sales. During the second quarter of 1996, the Company recorded a charge to operating expenses of $12.8 million upon Rite Aid Corporation's announcement that it had withdrawn its tender offer to acquire Revco (the "Rite Aid Charge"). Excluding the effect of the Rite Aid Charge, comparable operating expenses were $600.8 million or 22.5% of net sales. The 30 basis point improvement in comparable operating expenses as a percentage of net sales from 1996 was primarily due to (i) the benefit derived from sales in the Company's existing store base growing at a faster rate than operating costs, (ii) the benefit derived from a cost reduction program and (iii) the benefit derived from key technology investments such as the Company's RX 2000 Pharmacy System, Interactive Voice Response System for prescription refills, Pharmacy Data Warehouse, Point-of-Sale System, Retail Data Warehouse and Field Management System. These systems have collectively allowed the Company to reduce the labor costs associated with filling prescriptions, managing third party healthcare plans, managing promotional events and scheduling employees. OPERATING (LOSS) PROFIT for the second quarter of 1997 decreased $447.4 million to an operating loss of $306.0 million, compared to operating profit of $141.4 million for the second quarter of 1996. Excluding the effect of the Revco Inventory Markdown and the Revco Restructuring Charge (collectively, the "Revco Charges") in the second quarter of 1997, and the Rite Aid Charge in the second quarter of 1996, comparable operating profit increased $26.5 million or 17.2%. OTHER (EXPENSE) INCOME, NET for the second quarter of 1997 amounted to an expense of $16.5 million, compared to income of $54.6 million for the second quarter of 1996. The decrease in other (expense) income, net in 1997 was primarily due to the $76.6 million gain that was realized in the second quarter of 1996 upon the sale of certain equity securities (the "TJX Gain"). The Company orginally received these securities as a portion of the proceeds from the sale of the Marshalls division to The TJX Companies, Inc. in 1995. (LOSS) EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM for the second quarter of 1997 decreased $345.0 million to a loss of $230.8 million, compared to earnings of $114.2 million for the second quarter of 1996. Excluding the effect of the Revco Charges in the second quarter of 1997, and the Rite Aid Charge and the TJX Gain in 1996, earnings from continuing operations before extraordinary item increased $15.8 million or 20.5% to $92.8 million, or $.52 per share, compared to $77.0 million, or $.44 per share for the second quarter of 1996. 13 14 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations DISCONTINUED OPERATIONS - In June 1997, the Company sold its remaining investment in Linens 'n Things. Inc. for total proceeds of approximately $147.4 million, which resulted in a pre-tax gain of approximately $65 million. This gain has been reflected in discontinued operations. In conjunction with recording this gain, the Company recorded a pre-tax charge of approximately $35 million in discontinued operations to finalize certain liabilities accrued for in the CVS Restructuring Charge discussed below. During the second quarter of 1996, the Company recorded, as a component of discontinued operations, a pre-tax charge of $235.0 million ($148.0 million after tax) (the "CVS Restructuring Charge") after receiving approval from its Board of Directors to implement (i) a formal plan to separate the Linens 'n Things and Bob's divisions from the Company and (ii) a formal plan to convert 80 - 100 of Thom McAn's stores to the Footaction store format and to exit the Thom McAn business by mid-1997. EXTRAORDINARY ITEM - The Company recorded an after-tax charge in the amount of $17.1 million in the second quarter of 1997 relating to the early retirement of certain Revco debt (the "Extraordinary Item"). This charge, which includes early retirement premiums and the write-off of unamortized finance costs, has been classified as an extraordinary item in the accompanying consolidated condensed statements of operations. For further discussion, see "Liquidity and Capital Resources" below. NET (LOSS) EARNINGS for the second quarter of 1997 was a net loss of $230.5 million, or $1.37 per share, compared to a net loss of $39.3 million, or $.26 per share for the second quarter of 1996. SIX MONTHS NET SALES for the first six months of 1997 increased $1.1 billion or 20.8% to $6.3 billion, compared to net sales of $5.2 billion for the first six months of 1996. Same store sales, consisting of sales from stores that have been open for more than one year, rose 11.0%, with pharmacy same store sales increasing 17.5%. Pharmacy sales were 54.6% of total sales for the first six months of 1997, compared to 51.7% for the first six months of 1996. GROSS MARGIN for the first six months of 1997 increased $215.6 million or 14.5% to $1.7 billion, compared to $1.5 billion in 1996. Excluding the effect of the Revco Inventory Markdown, gross margin increased $290.6 million or 19.5% to $1.8 billion. The increase in gross margin dollars was primarily due to the increase in net sales for the period. Gross margin as a percentage of net sales for the first six months of 1997 was 27.0%, compared to 28.5 % for the first six months of 1996. Excluding the effect of the Revco Inventory Markdown, gross margin as a percentage of net sales was 28.2% for the first six months of 1997. The 30 basis point decline in 1997 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. 14 15 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations TOTAL OPERATING EXPENSES for the first six months of 1997 were $1.9 billion or 29.3% of net sales, compared to $1.2 billion or 23.0% of net sales for the first six months quarter of 1996. It is important to note that during the first quarter of 1997, the Company recorded a charge to operating expenses of $31.0 million for certain non-capitalizable costs associated with the restructuring of Big B, Inc., which the Company acquired in 1996 (the "Big B Restructuring Charge"). The significant components of the charge included: $5.3 million for store, distribution and MIS conversion costs, $18.7 million for store closing costs and $7.0 million for duplicate headquarters and administration costs. In accordance with EITF 94-3, this charge includes accrued liabilities related to certain exit plans for identified stores and duplicate corporate facilities. The charge primarily includes costs related to activities such as the cancellation of lease agreements and the write-down of unutilized fixed assets. These exit plans do not benefit the future activities of the retained stores or corporate facilities. Excluding the effect of the Revco Restructuring Charge and the Big B Restructuring Charge, comparable operating expenses for the first six months of 1997 were $1.4 billion or 22.3% of net sales. Excluding the effect of the Rite Aid Charge, comparable operating expenses for 1996 were $1.2 billion or 22.8% of net sales. The 50 basis point improvement in comparable operating expenses as a percentage of net sales from 1996 was primarily due to (i) the benefit derived from sales in our existing store base growing at a faster rate than operating costs, (ii) the benefit derived from a cost reduction program and (iii) the benefit derived from key technology investments such as our RX 2000 Pharmacy System, Interactive Voice Response System for prescription refills, Pharmacy Data Warehouse, Point-of-Sale System, Retail Data Warehouse and Field Management System. These systems have collectively allowed the Company to reduce the labor costs associated with filling prescriptions, managing third party healthcare plans, managing promotional events and scheduling employees. OPERATING (LOSS) PROFIT for the first six months of 1997 decreased $431.3 million to a loss of $144.9 million, compared to income of $286.4 million for the first six months of 1996. Excluding the effect of the Revco Charges and the Big B Restructuring Charge in the first six months of 1997 and the Rite Aid Charge in 1996, comparable operating profit increased $73.6 million or 24.6% to $372.8 million in 1997, compared to $299.2 million in 1996. Comparable operating profit as a percentage of net sales was 5.9% for the first six months of 1997, compared to 5.7% in 1996. OTHER (EXPENSE) INCOME, NET for the first six months of 1997 amounted to an expense of $29.3 million, compared to income of $37.8 million for first six months of 1996. The decrease in other (expense) income, net in 1997 was primarily due to the TJX Gain. (LOSS) EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM for the first six months of 1997 decreased $334.6 million to a loss of $148.1 million, compared to income of $186.5 million for the first six months of 1996. Excluding the effect of the Revco Charges and the Big B Restructuring Charge in the first six months of 1997, and the Rite Aid Charge and the TJX Gain in 1996, earnings from continuing operations before extraordinary item increased $45.1 million or 30.2% to $194.0 million, or $1.09 per share, compared to $148.9 million, or $.86 per share for the first six months of 1996. 15 16 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations EXTRAORDINARY ITEM - As discussed above, the Company recorded an after-tax charge in the amount of $17.1 million in the second quarter of 1997 relating to the early retirement of certain Revco debt. For further discussion, see "Liquidity and Capital Resources" below. DISCONTINUED OPERATIONS - As discussed above, in June 1997, the Company sold its remaining investment in Linens 'n Things. Inc. for total proceeds of approximately $147.4 million, which resulted in a pre-tax gain of approximately $65 million. This gain has been reflected in discontinued operations. In conjunction with recording this gain, the Company recorded a pre-tax charge of approximately $35 million in discontinued operations to finalize certain liabilities accrued for in the CVS Restructuring Charge. As further discussed above, during the second quarter of 1996, the Company recorded, as a component of discontinued operations, a pre-tax charge of $235.0 million ($148.0 million after tax) after receiving approval from its Board of Directors to implement (i) a formal plan to separate the Linens 'n Things and Bob's divisions from the Company and (ii) a formal plan to convert 80 - 100 of Thom McAn's stores to the Footaction store format and to exit the Thom McAn business by mid-1997. NET (LOSS) EARNINGS for the first six months of 1997 was a net loss of $147.7 million, or $.91 per share, compared to net earnings of $6.8 million for the first six months of 1996. As of June 28, 1997, the Company operated 3,924 stores in 24 states and the District of Columbia. LIQUIDITY AND CAPITAL RESOURCES The following discussion explains the significant developments affecting the Company's financial condition since December 31, 1996. This discussion should be read in conjunction with (i) the consolidated financial statements and notes thereto included in CVS Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 and (ii) the supplemental consolidated financial statements as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, together with the related supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations, in each case as restated for the merger of CVS and Revco, included in the Company's Current Report on Form 8-K filed on July 17, 1997 (amended by the Company's Current Report on Form 8-K/A filed on July 23, 1997). The Company has three primary sources of liquidity: (i) cash provided by operations, (ii) commercial paper and (iii) bank loan participation notes. In connection with the Merger, the Company replaced its $320 million credit facility with a $670 million, five year unsecured revolving credit facility and obtained a $330 million, 364 day unsecured revolving line of credit due May 29, 1998 (collectively the "Credit Facilities"). The Company can also obtain short-term financing through the issuance of bank loan participation notes. The Credit Facilities contain customary financial and operating covenants. Management believes that the restrictions contained in these covenants do not materially affect the Company's financial flexibility. The Company issues commercial paper to finance, in part, its seasonal inventory requirements and capital expenditures. Borrowing levels throughout the year are typically higher than those reflected in the Company's year-end balance sheet. Management believes that the Company's cash on hand and cash provided by operations, together with its ability to secure short-term financing through commercial paper and bank loan participation notes, will be sufficient to cover its working capital, capital expenditure and debt service requirements. 16 17 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations In connection with the Merger, on May 30, 1997, the Company repaid $600 million of bank debt outstanding under its Revco Bank Facility which was subsequently terminated (the "Bank Facility Repayment"). In June 1997, the Company redeemed $144.9 million aggregate principal amount of its 10.125% Senior Notes (the Debt Redemption") at 105% of the principal amount thereof plus accrued interest. In addition, on June 25, 1997, the Company commenced an offer (the "Debt Tender Offer") to purchase for cash $140 million aggregate principal amount of its 9.125% Senior Notes under which $118.8 million of the aggregate principal amount of the 9.125% Senior Notes were repurchased at an average price of 104.72% principal amount plus accrued interest. The Company expects to redeem the remaining 9.125% Senior Notes outstanding on January 15, 1998, the first redemption date, at 103% of principal plus accrued interest. The Bank Facility Repayment, Debt Redemption and Debt Tender Offer were financed with cash on hand and borrowings through the Company's commercial paper program. For the six months ended June 28, 1997, cash and cash equivalents decreased $396.9 million to $74.9 million. NET CASH USED IN OPERATING ACTIVITIES increased $142.7 million to $33.3 million for the first six months of 1997, compared to the first six months of 1996 primarily due to cash payments made pursuant to the Company's various restructuring activities and to decreases in accounts payable and accrued expenses which are primarily related to the Company's discontinued operations. NET CASH PROVIDED BY INVESTING ACTIVITIES decreased $89.3 million to $160.0 million during the first six months of 1997, compared to the first six months of 1996 primarily due to (i) lower capital expenditures in 1997 that resulted from the Company's discontinued operations and (ii) the decrease in the proceeds received from the sale or disposal of assets offset in part by the proceeds received from the sale of the Company's remaining investment in Linens 'n Things, Inc. and the sale of a note receivable that was received as a portion of the proceeds from the sale of a former division. NET CASH USED IN FINANCING ACTIVITIES increased $110.5 million to $523.6 million during the first six months of 1997, compared to the first six months of 1996 primarily due to the Bank Facility Repayment and Debt Redemption offset in part by a decrease in book overdrafts and an increase in the proceeds received from the issuance of common stock. CAPITAL EXPENDITURES Capital expenditures were $99.2 million and $143.6 million in the first six months of 1997 and 1996, respectively. These expenditures were primarily for (i) new stores, (ii) improvements to existing stores, (iii) store equipment, (iv) information systems and (v) distribution and office facilities. The lower capital expenditure level in 1997 was primarily due to the Company's discontinued operations. 17 18 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS We have made forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. Forward-looking statements include the information concerning future results of operations of CVS after completion of the merger with Revco; the information concerning CVS' ability to continue to achieve significant sales growth; the information concerning CVS' ability to continue to reduce selling, general and administrative expenses as a percentage of net sales; as well as those preceded by, followed by or that otherwise include the words: "believes," "expects," "anticipates," "intends," "estimates" or other similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this Form 10-Q (including in the notes to the consolidated condensed financial statements included herein) and in our Annual Report on Form 10-K for the year ended December 31, 1996, could affect the future results of CVS and could cause those results to differ materially from those expressed in our forward-looking statements: materially adverse changes in economic conditions generally in the markets served by CVS; material changes in inflation; future regulatory and legislative actions affecting the chain-drug industry; competition from other drugstore chains; from alternative distribution channels such as supermarkets, membership clubs, other retailers and mail order companies; and from third party plans; and the continued efforts of health maintenance organizations, managed care organizations, patient benefit management companies and other third party payors to reduce prescription drug costs. The forward-looking statements referred to above are also subject to uncertainties and assumptions relating to the operations and results of operations of CVS following the merger with Revco, including: risks relating to CVS' ability to combine the businesses of CVS and Revco and maintain current operating performance levels during the integration period and the challenges inherent in diverting CVS' management focus and resources from other strategic opportunities and from operational matters for an extended period of time during the integration process; CVS' ability to continue to secure suitable new store locations on favorable lease terms; relationships with suppliers; CVS' ability to continue to purchase inventory on favorable terms; and CVS' ability to attract, hire and retain suitable pharmacists and management personnel. 18 19 Part II Item 4 ================================================================================ Submission of Matters to a Vote of Security Holders On May 27, 1997 CVS held its Annual Meeting to Shareholders. Eleven Directors were elected for a term of one year expiring in May 1998. All directors continuing in service were reelected at the meeting. The individuals elected and the votes cast for each were: NAME FOR AGAINST ==================================================================== Allan J. Bloostein 97,401,104 667,419 W. Don Cornwell 97,403,447 665,076 Thomas P. Gerrity 97,401,682 666,841 Stanley P. Goldstein 97,390,156 678,367 William H. Joyce 97,405,632 662,891 Terry R. Lautenbach 97,400,814 667,709 Terrence Murray 97,402,416 666,107 Thomas M. Ryan 97,404,467 664,056 Ivan G. Seidenberg 97,402,047 666,776 Patricia Carry Stewart 97,396,874 671,649 M. Cabell Woodward, Jr. 97,388,534 679,989 The following additional items were voted upon at the meeting: (1) The approval of the proposed merger of CVS and Revco which was ratified by the following vote For Against Abstained Broker Non-Votes ================================================================================ 90,472,771 284,564 226,437 7,084,750 (2) The approval of the CVS 1997 Incentive Compensation Plan which was ratified by the following vote For Against Abstained Broker Non-Votes ================================================================================ 86,483,101 4,061,322 439,347 7,084,750 (3) The appointment of KPMG Peat Marwick LLP as CVS' independent auditors for the year ended December 31, 1997 which was ratified by the following vote For Against Abstained ======================================================= 97,659,078 141,116 268,328 19 20 Part II Item 6 ================================================================================ Exhibits and Reports on Form 8-K EXHIBITS: 11 Computation of Per Common Share Earnings 15 Letter re: Unaudited Interim Financial Information 27 Financial Data Schedule - June 28, 1997 99.1 Independent Auditors' Report 99.2 Letter re: Independent Auditors' Preferability Letter REPORTS ON FORM 8-K: On May 30, 1997, the Registrant filed a Current Report on Form 8-K in connection with the Registrant's completion of the merger of CVS Corporation and Revco D.S., Inc. On July 16, 1997, the Registrant filed a Current Report on Form 8-K in connection with complying with a covenant contained in its Merger Agreement with Revco D.S., Inc. that required CVS to report interim results for a period of at least 30 days following the effective time of the merger of CVS Corporation and Revco D.S., Inc. On July 17, 1997, the Registrant filed a Current Report on Form 8-K in connection with reporting interim results for the three and six months ended June 28, 1997. On July 17, 1997, the Registrant filed a Current Report on Form 8-K in connection with filing supplemental consolidated financial statements as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, together with the related supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations, in each case as restated for the merger of CVS Corporation and Revco D.S., Inc. On July 23, 1997, the Registrant filed a Current Report on Form 8-K/A in connection with correcting the date of the report of Arthur Andersen LLP on the consolidated statements of income, changes in stockholders' equity and cash flows of Revco D.S., Inc. and Subsidiaries for the fiscal year ended June 3, 1995 included as Exhibit 99.1 of Registrant's Current Report on Form 8-K filed on July 17, 1997 which was inadvertently dated July 27, 1997 rather than July 27, 1995. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CVS Corporation (Registrant) /s/ Charles C. Conaway CHARLES C. CONAWAY Executive Vice President and Chief Financial Officer August 8, 1997 20 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 Part II Exhibit 11 ================================================================================ Computation of Per Common Share Earnings
Three Months Ended Six Months Ended ============================================================================================================= JUNE 28, June 29, JUNE 28, June 29, In millions, except per share amounts 1997 1996 1997 1996 ============================================================================================================= PRIMARY EARNINGS PER COMMON SHARE: Net earnings $(230.5) $(39.3) $(147.7) $ 6.8 Less: Preference dividends, net (3.4) (3.6) (6.8) (7.2) - ------------------------------------------------------------------------------------------------------------- Net earnings used to calculate primary earnings per common share $(233.9) $(42.9) $(154.5) $ (.4) ============================================================================================================= Weighted average common shares outstanding 167.9 166.2 167.3 164.9 Add: Weighted average number of shares which could have been issued upon exercise of outstanding stock options 3.4 .9 3.4 .7 - ------------------------------------------------------------------------------------------------------------- Weighted average number of shares used to compute primary earnings per common share 171.3 167.1 170.7 165.6 ============================================================================================================= Primary earnings per common share $ (1.37) $ (.26) $ (.91) $ -- ============================================================================================================= FULLY DILUTED EARNINGS PER COMMON SHARE: Net earnings $(230.5) $(39.3) $(147.7) $ 6.8 Less: Adjustments, assuming conversion of the Series One ESOP Convertible Preference Stock, for the following: (i) additional contributions to the ESOP to cover the shortfall between the Series One ESOP Convertible Preference Stock and Common Stock dividends and (ii) reductions in incentive bonuses and profit sharing, net of tax benefits (1.1) (1.9) (3.4) (6.0) - ------------------------------------------------------------------------------------------------------------- Net earnings used to calculate fully diluted earnings per common share $(231.6) $(41.2) $(151.1) $ .8 ============================================================================================================= Weighted average common shares outstanding 167.9 166.2 167.3 164.9 Add: Weighted average number of shares which could have been issued upon conversion of the Series One ESOP Convertible Preference Shares 5.3 1.7 5.4 7.0 Add: Weighted average number of shares which could have been issued upon exercise of outstanding stock options 3.8 7.0 3.9 1.7 - ------------------------------------------------------------------------------------------------------------- Weighted average number of shares used to compute fully diluted earnings per common share 177.0 174.9 176.6 173.6 ============================================================================================================= Fully diluted earnings per common share $ (1.31) $ (.24) $ (.86) $ -- ============================================================================================================= =============================================================================================================
21 EX-15 3 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION 1 Part II Exhibit 15 ================================================================================ Letter re: Unaudited Interim Financial Information CVS Corporation Woonsocket, Rhode Island Board of Directors: Re: Registration Statements Numbers 33-40251, 33-17181, 2-97913, 2-77397 and 2-53766 on Form S-8 and 333-24163 on Form S-4 and 333-31449 on Form S-3 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 30, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, /s/ KPMG Peat Marwick LLP - -------------------------- KPMG PEAT MARWICK LLP Providence, Rhode Island August 7, 1997 22 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AND THE CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-28-1997 74,900 4,100 390,800 11,300 2,346,800 3,180,200 1,619,200 596,600 5,310,900 2,354,000 591,700 0 0 1,700 2,145,000 5,310,900 6,321,500 6,321,500 4,615,000 4,615,000 1,851,400 0 29,300 (174,200) (26,100) (148,100) 17,500 (17,100) 0 (147,700) (.91) (.86)
EX-99.1 5 REPORT OF KPMG PEAT MARWICK 1 Part II Exhibit 99.1 ================================================================================ Independent Auditors' Report Board of Directors and Stockholders CVS Corporation: We have audited the consolidated balance sheets of CVS Corporation as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996. These consolidated financial statements (not presented separately herein) are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Revco D.S., Inc., a wholly-owned subsidiary, which statements reflect total assets constituting 51.5 percent and 52.1 percent as of December 31, 1996 and 1995, respectively, and total revenues constituting 49.5 percent, 50.2 percent and 50.6 percent in 1996, 1995 and 1994, respectively, of the related consolidated totals (for continuing operations). Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Revco D.S., Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements (not presented separately herein) referred to above present fairly, in all material respects, the financial position of CVS Corporation as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ KPMG Peat Marwick LLP - ---------------------------- KPMG PEAT MARWICK LLP Providence, Rhode Island July 16, 1997 24 EX-99.2 6 LETTER: RE PREFERABILITY OF KPMG PEAT MARWICK 1 Part II Exhibit 99.2 ================================================================================ Letter re: Independent Auditors' Preferability Letter August 7, 1997 CVS Corporation One CVS Drive Woonsocket, RI 02895 Ladies and Gentlemen: We have audited the consolidated balance sheets of CVS Corporation, as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and have reported thereon under date of July 16, 1997. The aforementioned consolidated financial statements and our report thereon are incorporated by reference on Form S-3, filed July 16, 1997. As stated on page 17 of the Company's 1996 consolidated financial statements, which is incorporated by reference on Form S-3, the Company states the Revco portion of inventories and cost of sales have been restated from last-in, first-out ("LIFO") method to the first-in, first-out method ("FIFO") in order to conform the accounting method for combined inventories. The Company states in its consolidated financial statements that the change is a conforming change for the acquired inventories for both book and tax based on the presumption that all like inventory should be calculated on the same method. In addition, the Company believes the change provides a better matching of income and expenses due to the stability of costs and a better representation in the statement of position. In accordance with your request, we have reviewed and discussed with Company officials the circumstance and business judgment and planning upon which the decision to make this change in the method of accounting was based. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of CVS Corporation"s compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances. Very truly yours, /s/ KPMG Peat Marwick LLP - -------------------------- KPMG PEAT MARWICK LLP Providence, Rhode Island 25 -----END PRIVACY-ENHANCED MESSAGE-----