CVS Health

CVS

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$110.45 B

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🇺🇸 United States

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K



----------------------

(Mark One)



/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 1997



/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from        to



Commission file number 1-1011



CVS CORPORATION

(Exact name of registrant as specified in its charter)



-----------------------



Delaware                            05-0494040

(State or other jurisdiction               (I.R.S. Employer

of incorporation or organization)           Identification No.)



One CVS Drive

Woonsocket, Rhode Island                       02895

(Address of principal executive offices)           (Zip Code)



Registrant's telephone number, including area code: (401) 765-1500



Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class                Name of each exchange on which registered

- -----------------------              -----------------------------------------

Common Stock, par value

$.01 per share                                New York Stock Exchange



Securities registered pursuant to Section 12(g) of the Exchange Act: None



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 [ ]



Indicate by check mark if disclosure of delinquent filers pursuant to Item

405 of Regulation S-K is not contained herein, and will not be contained, to the

best of registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K. [X]



The aggregate market value of the registrant's voting stock* held by

non-affiliates** of the registrant (without admitting that any person whose

shares are not included in such calculation is an affiliate) on March 2, 1998

was approximately $12,669,785,088, based on the last sale price as reported by

the New York Stock Exchange.



As of March 2, 1998, the registrant had 172,557,470 shares of Common

Stock outstanding.



- ---------



*   Does not include 5,324,504 outstanding shares of Series One ESOP

Convertible Preference Stock ("ESOP Preference Stock"). As of

March 2, 1998, each share of ESOP Preference Stock is entitled to 1.2 votes

per share on all matters submitted to a vote of the holders of Common

Stock.



**  Only voting stock held by directors and executive officers is excluded.

DOCUMENTS INCORPORATED BY REFERENCE



The following documents (or parts thereof) are incorporated by reference

into this Annual Report on Form 10-K: certain information required in Part

II, Items 6, 7 and 8; and Part IV, Item 14 of this Annual Report on Form 10-K

is incorporated from the Registrant's Annual Report to Shareholders for the

year ended December 31, 1997; certain information required in Part III, Items

10, 11, 12 and 13 of this Annual Report on Form 10-K is incorporated by

reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of

Stockholders, to be held on May 13, 1998.

PART I



ITEM 1. BUSINESS



GENERAL



CVS Corporation, a Delaware corporation ("CVS" or the "Company"), is a

leader in the chain drugstore industry in the United States, with over $12.7

billion in revenue in 1997. Additionally, as of December 31, 1997, the Company

operated 3,888 stores in 24 states in the Northeast, Mid-Atlantic, Midwest and

Southeast regions and in the District of Columbia, making CVS one of the largest

drugstore chains in the nation in terms of store count. The Company's stores are

well positioned, operating in 48 of the top 100 drugstore markets in the

country. CVS commands the number one or two share position in approximately 80%

of these markets. CVS also is among the industry leaders in terms of store

productivity and operating profit margin.



A primary focus of the Company's operations is its pharmacy business, which

represented approximately 54% of total sales for the year. In 1997, the Company

dispensed over 225 million prescriptions, making it the largest drugstore chain

in the United States in terms of prescriptions filled and pharmacy sales. The

Company believes that its pharmacy operations will continue to represent a

critical part of its business and strategy due to favorable trends, including an

aging American population, greater responsibility being borne by Americans for

their healthcare, an increasing demand for retail formats that provide easy

access and convenience, discovery of new and better drug therapies, and the need

for cost effective healthcare solutions.



In addition to prescription drugs and services, the Company offers a broad

selection of general merchandise, presented in a well-organized fashion, in

stores that are designed to be warm, inviting and easy to shop. Merchandise

categories include, among other things, over-the-counter drugs, greeting cards,

film and photo-finishing services, beauty and cosmetics, seasonal merchandise

and convenience foods. The Company also offers over 1,300 products under the CVS

private label brand, which accounted for approximately 11% of the Company's

front store sales in 1997. Total front store sales, which are generally higher

margin than pharmacy sales, represented approximately 46% of total sales for the

year.



The Company's principal executive offices are located at One CVS Drive,

Woonsocket, Rhode Island 02895, telephone (401) 765-1500. As of December 31,

1997, the Company and its subsidiaries had approximately 90,000 employees.



CVS STRATEGIC RESTRUCTURING PROGRAM



In October 1995, the Board of Directors approved a comprehensive

restructuring plan that was the product of a strategic review initiated in 1994.

The purpose of the restructuring plan was, among other things, to enhance

stockholder value by transforming Melville Corporation ("Melville") from a

diversified retailer with a wide range of specialty retail businesses into an

industry-focused retail healthcare company, CVS. The restructuring plan

included, among other things:



(i) the continued operation of CVS (which would include CVS and, initially,

Linens 'n Things and Bob's Stores);



(ii) the disposal of Marshalls, Kay-Bee Toys, Wilsons and This End Up;



(iii) the spinoff of Footstar, Inc. (the holding company for Meldisco,

Footaction and Thom McAn); and



(iv) the elimination of certain corporate overhead costs.



In May 1996, the Board of Directors approved further refinements to the

restructuring plan. The refinements included: (i) a formal plan to separate

Linens 'n Things and Bob's Stores from CVS; and (ii) a formal plan to convert

80 to 100 Thom McAn stores to the Footaction format and to sell or close the

remaining Thom McAn stores, and thereby exit the Thom McAn business by

mid-1997.



On November 20, 1996, following shareholder approval, CVS, a newly-formed

Delaware corporation, became the new holding company for Melville (which is a

New York corporation) and its subsidiaries. This was accomplished by merging a



1

special purpose subsidiary of CVS with and into Melville, with Melville

surviving such merger and becoming a wholly-owned subsidiary of CVS.



For more information regarding the Company's strategic restructuring

program, see Note 3 of Notes to Consolidated Financial Statements.





ACQUISITION OF REVCO D.S., INC.



On May 29, 1997, CVS completed its acquisition of Revco D.S., Inc. ("Revco")

pursuant to a stock-for-stock merger that was tax free to Revco's stockholders.

The merger was accounted for as a pooling of interests.



The merger resulted in CVS becoming one of the largest chain drugstore

companies in the United States based on store count, with approximately 4,000

stores in 24 states and the District of Columbia. Pursuant to a consent

decree with the Federal Trade Commission entered into in connection with the

merger, the Company divested 120 Revco stores during 1997, primarily in the

Tidewater area of Virginia.



In the merger, each outstanding share of Revco common stock was exchanged

for 0.8842 of a share of CVS common stock, resulting in CVS issuing an aggregate

of approximately 60.3 million shares of its common stock. In addition,

outstanding Revco stock options were converted at the same exchange ratio into

options to purchase approximately 3.3 million shares of CVS common stock.



AGREEMENT TO ACQUIRE ARBOR DRUGS, INC.



On February 8, 1998, CVS entered into an Agreement and Plan of Merger with

Arbor Drugs, Inc. ("Arbor"). Under the terms of the merger agreement, subject to

satisfaction of certain customary closing conditions, CVS will acquire Arbor in

an exchange of stock that is expected to be accounted for as a pooling of

interests, and to be tax free to Arbor stockholders. If the merger is completed,

Arbor stockholders will receive, for each Arbor share, 0.3182 of a share of

CVS common stock, resulting in CVS issuing an aggregate of approximately 18.9

million shares of its common stock.  In addition, outstanding Arbor stock

options will be converted at the same exchange ratio into options to purchase

approximately 2.6 million shares of CVS common stock.



Arbor is the leading drugstore chain in southeastern Michigan in terms of

store count and sales volume. The merger would strengthen CVS' position as one

of the nation's leading chain drugstore companies by bringing CVS into a

high-growth, contiguous geographic market where CVS has no existing presence.



The merger is subject to approval by Arbor's shareholders, expiration of

the applicable waiting period under the Hart-Scott-Rodino Antitrust

Improvements Act of 1976, as amended, and certain other customary closing

conditions. Subject to satisfying these conditions, management expects to

complete the merger on or about March 31, 1998.





PHARMACY OPERATIONS AND MANAGED CARE



In 1997, pharmacy sales increased 23.6% to $6.9 billion, representing

approximately 54% of total sales for the year, compared to pharmacy sales of

$5.6 billion in 1996, representing approximately 51% of total sales for such

year. CVS pharmacies fill an average of about 1,200 prescriptions per store per

week, which is significantly higher than the average community pharmacy. The

Company believes that its pharmacy operations will continue to represent a

critical part of its business and strategy due to favorable trends, including an

aging American population, greater responsibility being borne by Americans for

their healthcare, an increasing demand for retail formats that provide easy

access and convenience, discovery of new and better drug therapies, and the need

for cost effective healthcare solutions.



During fiscal 1997, approximately 80% of pharmacy sales were attributable

to payments by third party providers under prescription drug plans, as

compared to approximately 76% in 1996. The growth in managed care has

substantially increased the use of prescription drugs as managed care

providers have (i) made the cost of prescription drugs more affordable to a

greater number of people and (ii) supported prescription drug therapy as an

alternative to more expensive forms of treatment, such as surgery. In a

typical third party payment plan, the Company has a contract with a third

party payor, such as an insurance company, a prescription benefit management



2

company, a governmental agency, a private employer, a health maintenance

organization or other managed care provider, which agrees to pay for all or a

portion of a customer's eligible prescription purchases in exchange for

reduced prescription rates. Although third party payment plans provide a high

volume of prescription drug sales, such sales typically generate lower gross

margins than other prescription drug sales due to the cost containment

efforts of these large third party payors and the increasing competition

among pharmacies for this business. During 1997, the top 5 third party

providers accounted for approximately 36% of pharmacy sales. Any significant

loss of third party provider business could have a material adverse affect on

the Company's business and results of operations.



CVS' experience in providing solutions to managed care providers, and its

existing store base which affords easy access and convenience to consumers,

are factors that should contribute to the Company's continued ability to

attract and maintain third party business. In addition, the Company's RX2000

pharmacy computer system facilitates the management of third party healthcare

plans and enables CVS to provide managed care providers with a level of

information which the Company believes is unmatched by competitors. By

analyzing this data, CVS and its managed care partners are able to evaluate

treatment outcomes with an eye toward improving care and containing costs.

The Company's emphasis on customer service extends from the expert advice and

service that individual customers receive from CVS pharmacists to the managed

care portion of the Company's business, where Managed Care Service Teams are

responsible for ensuring the high level of service that CVS' managed care

partners receive.



The Company's pharmacy business also continues to benefit from an

"independent file buy" program, in which CVS purchases prescription files from

one or more independent pharmacies. During 1997, CVS purchased 190 prescription

files, containing an average weekly prescription count of nearly 500, from

independent pharmacies. The Company believes that independent file buys are

productive investments. In many cases, the independent pharmacist will move to

CVS, thereby providing continuity in the pharmacist-patient relationship.



PHARMACARE AND STRATEGIC HEALTHCARE ALLIANCES



CVS is committed to being part of an integrated healthcare approach that

brings together industry participants such as physicians, pharmaceutical

companies, managed care providers and pharmacies in order to provide patients

with the best possible care at the lowest cost. The Company's efforts to date

have primarily concentrated on two main areas: (i) the operation and expansion

of PharmaCare, the Company's prescription benefit management subsidiary and (ii)

the creation of strategic alliances with healthcare partners.



PharmaCare provides managed care providers a full range of prescription

benefit management services, including plan design and administration, formulary

management, claims processing and generic substitution, with a focus on

providing integrated solutions to the delivery of healthcare. In the three and a

half years since it was established, PharmaCare has grown considerably and, at

the end of 1997, managed healthcare services for more than 5 million people

through a preferred national pharmacy network of approximately 40,000

pharmacies. In December 1997, PharmaCare merged with Revco's prescription

benefit management subsidiary, called Rx Connections, and also assumed Revco's

mail order pharmacy operations, thereby strengthening and broadening

PharmaCare's services network.



One of the features that sets PharmaCare apart from other prescription

benefit management providers is its proprietary Clinical Information Management

System ("CIMS"). CIMS enables CVS pharmacists to work more efficiently with

physicians by facilitating communication and information-sharing, with the

objective of improving patient care and reducing costs. Approximately 20,000

physicians are currently using CIMS, which began with only 500 physicians in

1994. In addition, PharmaCare plays an increasing role in healthcare management

through integrated partnerships with several large managed care providers.



CVS also pursues strategic alliances with healthcare partners to develop

products and services that create new opportunities for revenue and profit

growth. For example, CVS has entered into a joint venture, called CVS Health

Connection, with Pfizer Health Solutions, Inc., a subsidiary of Pfizer, Inc.

Through this partnership, community health screening centers are established in

CVS store settings. The first CVS Health Connection center opened in September

1997 in a New Bedford, Massachusetts CVS store. Harvard Pilgrim Healthcare, one

of the nation's largest and most progressive HMOs, has contracted to offer

health screening services through this center to its members.



3

FRONT STORE OPERATIONS



In 1997, front store sales increased 8.8% to $5.8 billion, representing

approximately 46% of total sales for the year, compared to front store sales of

$5.3 billion in 1996, representing approximately 49% of total sales for such

year. The Company's front store merchandising strategies are designed to improve

customer satisfaction, selection and convenience, and establish CVS stores as a

destination for a growing number of front store merchandise categories, such as

greeting cards, photo-finishing, beauty, seasonal merchandise and

over-the-counter drugs. The Company's 10,125 square-foot freestanding prototype

stores have helped to enable the Company to improve store layout, convenience

and selection through the addition of product categories and the enhancement of

assortments within product categories. In addition, over the past several years,

the Company has made significant investments in systems and technology to more

effectively respond to customer needs, manage inventory and control costs.



Through its point-of-sale scanning technology, the Company has developed an

advanced retail data warehouse of information that has enabled CVS to adopt a

category management approach to front end merchandising. Through category

management, CVS works in partnership with major suppliers to refine and tailor

assortments within product categories to the specific purchasing preferences of

customers within each market. Category management enables the Company to analyze

the impact of pricing, promotion and mix on a category's sales and profitability

and develop tactical merchandising plans for each category by market. Among CVS'

key destination categories are over-the-counter drugs, greeting cards, film and

photo-finishing services, beauty and cosmetics and convenience foods.



The Company believes that effective category management increases

customer satisfaction and that its category management approach has been a

primary factor in its front store comparable sales gains and improved gross

margins. In addition, the Company believes that its ability to satisfy

customers through category management will be enhanced through its

implementation of supply chain management. Supply chain management is

designed to more effectively link CVS' stores and distribution centers with

suppliers to speed the delivery of merchandise to CVS stores in a manner that

both reduces out-of-stock positions and lowers the Company's investment in

inventory. The Company expects to see tangible benefits of its supply chain

management project beginning in 1998.



CVS STORES



At December 31, 1997, the Company operated 3,888 stores in 24 states in the

Northeast, Mid-Atlantic, Midwest and Southeast regions and the District of

Columbia, making CVS one of the nation's largest chain drugstore companies based

on store count. CVS stores, which are located primarily in "strip" shopping

centers or in freestanding units, generally range in size from approximately

8,000 to 10,000 square feet, with an average store size of approximately 9,000

square feet. The Company has extended store hours in many locations and, at the

end of 1997, approximately 160 of its stores were operated on a 24-hour basis.

The following is a breakdown by state of the locations of the Company's stores

at the end of 1997:



<TABLE>

<S>                                    <C>     <C>                                    <C>

Alabama..............................  164     New Hampshire........................   30



Connecticut..........................  118     New Jersey...........................  175



Delaware.............................    3     New York.............................  340



District of Columbia.................   46     North Carolina.......................  309



Florida..............................   23     Ohio.................................  395



Georgia..............................  316     Pennsylvania.........................  317



Illinois.............................   69     Rhode Island.........................   50



Indiana..............................  298     South Carolina.......................  188



Kentucky.............................   68     Tennessee............................  148



Maine................................   20     Vermont..............................    2



Maryland.............................  170     Virginia.............................  258



Massachusetts........................  314     West Virginia........................   63



Mississippi..........................    4

</TABLE>



To support growth in its existing stores, the Company has in place an active

remodeling and remerchandising program, which seeks to remodel 20% of the

Company's existing stores each year and to remerchandise another 20% each year.

In addition, as described more fully below, the Company is actively seeking to

relocate many of its strip center locations to freestanding sites. During 1997,



4

the Company opened 287 new stores, including 116 relocations, and in 1998

expects to open approximately 300 new stores, including approximately 150

relocations. During 1997, the Company also began the process of converting

all retained Revco stores into the CVS store format. The conversion process

consists of three elements: converting the Revco point-of-sale and pharmacy

computer systems to CVS' systems, revising the Revco planograms to reflect

the CVS merchandise mix, and remodeling the Revco stores to the "look and

feel" of a CVS store. The conversion of Revco's systems has been completed

and the revision of planograms is expected to be completed during the first

half of 1998. Approximately 500 Revco stores had been remodeled into the CVS

"look and feel" as of December 31, 1997, and the Company expects to complete

the Revco store remodeling project by the end of 1998.



The addition of new stores has played, and will continue to play, a major

role in the Company's continued growth. As new stores have been opened, the

Company has maintained its objective of securing strong positions in each

market that its stores serve. This provides the Company several important

advantages, including an ability to save on advertising and distribution

costs. It is also an important consideration for managed care providers, who

want to provide their members with convenient access to pharmacy services.

Management anticipates that most of the planned store openings will be based

on CVS' 10,125 square foot freestanding prototype, which includes a

drive-thru pharmacy. New sites will be selected based on convenience, with an

emphasis on freestanding locations at traffic controlled intersections.



Management expects that relocations of existing in-line strip center

stores to freestanding locations will account for approximately 50% of store

openings over the next several years. Historically, as a result of their more

convenient locations and larger size, relocated stores have typically

realized significant improvement in customer count and revenues, driven

largely by increased sales of higher margin front store merchandise.

Management expects this trend to continue, however there can be no assurance

that similar improvements will be achieved in each geographic market in which

the Company operates. See "Cautionary Statement Concerning Forward-Looking

Statements" below. Freestanding locations require properties of approximately

1 1/4 acres to support parking for 40-60 cars. As a result, site selection is

also an important aspect of the Company's relocation program.



The Company believes that achieving a critical mass in terms of store count

and locating stores in desirable geographic markets is essential to competing

effectively in the context of the current managed care environment described

more fully above. As a result, management believes that the Company's store

development program is an important element of its ability to maintain its

leadership position in the chain drugstore industry.



INFORMATION SYSTEMS



CVS has made significant investments in information systems to enable the

Company to deliver an exceptional level of customer service, while lowering

costs and increasing operating efficiency. The Company's client-server based

systems permit rapid and flexible system development to meet changing business

needs, enabling the integration of CVS systems with those of other healthcare

providers, including many of the Company's managed care customers. With a

scaleable technical architecture, CVS can efficiently expand its network and add

stores.



In the Company's pharmacy business, the RX2000 computer system enables CVS

pharmacists to manage their prescription filling duties more efficiently, giving

them more time to spend with customers. The RX2000 system, which includes one of

the largest data warehouses in the country, facilitates the management of third

party healthcare plans and provides a warehouse of pharmacy data that can be

analyzed by both CVS and its managed care customers for a variety of healthcare-

and business-related applications. In addition, during 1997 the Company

implemented CVS Rapid Refill, an interactive voice response system that enables

customers to place refill orders by telephone 24 hours a day.



In the front store business, the Company has developed an advanced "Retail

Data Warehouse" that enables a quick analysis of point-of-sale ("POS") data on a

store-by-store basis to develop targeted marketing and merchandising strategies.

The Company has also implemented a "Field Management System" that uses POS data

to identify areas to improve operational execution on a store-by-store basis. In

addition, the Company is in the process of a major supply chain initiative to

reengineer its entire warehouse and merchandising network, which is intended to

enable the more efficient and effective control of merchandise flow to CVS

stores.



5

SUPPLIERS



The Company centrally purchases most of its merchandise, including

prescription drugs, directly from manufacturers, allowing it to take advantage

of the promotional and volume discount programs that certain manufacturers offer

to retailers. During 1997, approximately 85% of the merchandise purchased

by the Company was received at one of the Company's distribution centers for

redistribution to its stores. The balance of store merchandise is shipped

directly to CVS stores from manufacturers and distributors at prices negotiated

at the corporate level.





The Company believes that the loss of any one supplier or group of suppliers

under common control would not have a material effect on its business.



CUSTOMER SERVICE



CVS strives to provide the highest levels of service to its customers and

partners. As a result, the Company devotes considerable time and attention to

people, systems and high service standards. The Company places an emphasis on

attracting and training friendly and helpful associates to work both in CVS

stores and throughout the CVS organization. Each CVS store receives a formal

customer service evaluation twice per year, based on a mystery shopper program,

customer letters and calls, and market research. CVS' priority on customer

service extends into the managed care portion of its business as well. In every

market, a Managed Care Service Team is responsible for ensuring that managed

care partners are receiving high levels of service. CVS pharmacists consistently

rank at the top of the industry on measurements of trust, relationship-building

and accessibility. This high level of service and expertise has played a key

role in enabling the growth of CVS' pharmacy operations.



REGULATION



The Company's pharmacies and pharmacists are required to be licensed by the

appropriate state boards of pharmacy. The Company's pharmacies and its

distribution centers are also registered with the Federal Drug Enforcement

Agency. By virtue of these licensing and registration requirements, the Company

is required to comply with various statutes, rules and regulations, a violation

of which could result in a suspension or revocation of such licenses or

registrations. Under the Omnibus Budget Reconciliation Act of 1990, the

Company's pharmacists are required to offer counseling, without charge, to

customers covered by Medicare about medication, dosage, delivery system,

potential side effects, and other information deemed significant by such

pharmacists. The Company's pharmacists in fact routinely offer such counseling

to consumers.



COMPETITION



The retail drugstore business is highly competitive. The Company believes

that it competes principally on the basis of: (i) store location and

convenience, (ii) customer service and satisfaction, (iii) product selection and

variety and (iv) price. The Company experiences active competition not only from

independent and other chain drugstores, but also from health maintenance

organizations, hospitals, mail order organizations, supermarkets, discount

drugstores and discount general merchandisers. The deep discount drug segment

has experienced significant growth over the past several years as drug chains,

food, discount and specialty retailers have entered the business. Major retail

companies now operate deep discount drugstores in the most competitive retailing

markets. "Combo" stores, which consist of grocery, drugstore and several other

operations under the same roof, have also experienced significant growth over

the past several years as consumers have become more attracted to one-stop

shopping. Retail mass merchandisers with prescription departments have also

grown in popularity. The Company is among the nation's largest chain drugstores,

in terms of both store count and annual sales volume.



CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS



This report (as well as other public filings, press releases and discussions

with Company management) contains and incorporates by reference certain

forward-looking statements that are subject to risks and uncertainties.

Forward-looking statements include the information concerning future results of

operations, cost savings and synergies of the Company following the Revco merger

and the Arbor acquisition; the information concerning the Company's ability to

continue to achieve significant sales growth; the information concerning the



6

ability of the Company to elevate the performance level of Revco stores

following the Revco merger; the information concerning the Company's belief

that it can continue to improve operating performance by relocating existing

in-line stores to freestanding locations; and the information concerning the

Company's ability to continue to reduce selling, general and administrative

expenses as a percentage of net sales; as well as those preceded by, followed

by or that otherwise include the words "believes", "expects", "anticipates",

"intends", "estimates" or 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 report and in the documents which are incorporated by

reference, and in our other public filings, press releases and discussions

with Company management, could affect the future results of CVS and could

cause those results to differ materially from those expressed in the

forward-looking statements: materially adverse changes in economic conditions

in the markets served by the Company; future regulatory and legislative

actions affecting the Company and/or the chain-drug industry; competition

from other drugstore chains, from alternative distribution channels such as

supermarkets, membership clubs, other retailers and mail order companies and

from other third party plans; and the continued efforts of health maintenance

organizations, managed care organizations, pharmacy benefit management

companies and other third party payors to reduce prescription drug costs. The

forward looking statements referred to above are also subject to

uncertainties and assumptions relating to the operations and results of

operations of the Company following the Revco merger and the Arbor

acquisition, including: risks relating to the Company's ability to combine

the businesses of CVS, Revco and Arbor and maintain current operating

performance levels during the integration period(s) and the challenges

inherent in diverting the Company's management focus and resources from other

strategic opportunities and from operational matters for an extended period

of time during the integration process(es); the Company's ability to continue

to secure suitable new store locations on favorable lease terms as it seeks

to open new stores and relocate a portion of its existing store base to

freestanding locations; the Company's ability to continue to purchase

inventory on favorable terms; the Company's ability to attract, hire and

retain suitable pharmacists and management personnel; the ability of the

Company and its key vendors to successfully manage Year 2000 issues;

relationships with suppliers; and the impact of inflation.



ITEM 2. DESCRIPTION OF PROPERTY



Most CVS stores are occupied pursuant to long-term leases that vary as to

rental amounts and payments, expiration dates, renewal options and other rental

provisions. The Company does not deem any individual store lease to be

significant in relation to its overall business. For information as to the

amount of the Company's rental obligations for retail store leases, see Note 9

of Notes to Consolidated Financial Statements.



The Company owns its corporate headquarters, located in two buildings in

Woonsocket, Rhode Island which contain an aggregate of approximately 312,000

square feet. Additionally, the Company recently announced plans to begin

construction of a third headquarters building, expected to contain in excess of

200,000 square feet, on a site adjacent to its corporate headquarters. The

Company also owns distribution centers located in Rhode Island, New Jersey,

Virginia, Indiana, Alabama, Pennsylvania, Tennessee, North Carolina and South

Carolina, which contain an aggregate of approximately 4,944,000 square feet, and

leases additional space near its distribution centers which contain an aggregate

of approximately 1,189,000 square feet. In addition, the Company owns an office

building located in Woonsocket, Rhode Island which contains approximately 33,000

square feet. The Company also leases approximately 41,000 square feet in an

office building in Lincoln, Rhode Island and four "satellite" store support

buildings located in Rhode Island and Massachusetts which contain an aggregate

of approximately 146,000 square feet. The Company also owns Revco's former

corporate headquarters, located in Twinsburg, Ohio, which contains approximately

108,000 square feet, and leases an additional 151,000 square feet in Twinsburg

formerly used for Revco store support. All of the Company's Twinsburg facilities

are expected to be consolidated or closed in 1998.



In addition, in connection with certain dispositions of divisions

completed between 1991 and 1997, CVS continues to guaranty certain lease

obligations for store leases that had been entered into and guaranteed by the

Company prior to the time of disposition for approximately 2,000 former

stores. The Company is indemnified for these guarantee obligations by the

respective purchasers. These guarantees generally remain in effect for the

initial lease term and any extension thereof pursuant to a renewal option

provided for in the lease prior to the time of the disposition. See Note 8 of

Notes to Consolidated Financial Statements.



7

ITEM 3. LEGAL PROCEEDINGS

From time to time the Company and its subsidiaries are involved in the

assertion of claims and in litigation incidental to the normal course of

business. Management does not believe that any existing claims or litigation

will have a material adverse effect on the consolidated financial condition or

results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth

quarter of the year ended December 31, 1997.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is included as an unnumbered item in Part I of this Report.

<TABLE>

DATE FIRST

DATE APPOINTED APPOINTED

TO PRESENT OFFICER OF

OFFICE OF THE THE

NAME/OFFICE AGE COMPANY COMPANY

- ----------------------------------------------------------------------------- --- -------------- ------------

Charles C. Conaway

Executive Vice President and Chief Financial Officer,

CVS Corporation and CVS Pharmacy, Inc ..................................... 37 07/10/96 07/10/96

Stanley P. Goldstein

Chairman of the Board and Chief Executive Officer,

CVS Corporation............................................................ 63 01/01/87 04/13/71

Rosemary Mede