The year 2000 was an exceptional year for CVS by any measure. We achieved continued strong financial results, including record sales, operating profit and net earnings. We also made significant strides toward our goal of being the most customer-focused, innovative and convenient healthcare service retailer in America, with four complementary and growing healthcare businesses—CVS/pharmacy, ProCare, PharmaCare, and CVS.com—serving the needs of all our customers.

"We are a recognized leader in our industry and believe CVS is better positioned than at any time in the Company's history to capitalize on the significant opportunities in healthcare."

Excellent Financial Performance and Shareholder Returns

    Net sales for the year reached a record $20.1 billion, up 13% from $17.7 billion in 1999 (on a comparable 52-week basis), while same store sales surged 11% and led the industry. Net earnings, excluding a one-time gain of $19 million related to a litigation settlement, advanced to a record $735 million, or $1.80 per share, up 18% from $1.52 per share in 1999 on a comparable 52-week basis. We continue to generate significant free cash flow, reaching $384 million in 2000, ahead of our goal and significantly higher than the $233 million we reported in 1999. This outstanding performance solidified our track record of meeting or beating Wall Street's expectations every quarter since we became a stand-alone public company in the Fall of 1996, and has translated into excellent returns for our shareholders.
    For the year, CVS' share price climbed more than 50%, compared with a 6% decline in the Dow Jones Industrial Average, and a 10% decline in the S&P 500 Index. In contrast to 1999, when investors flocked to technology stocks and, more specifically, to pure-play Internet stocks, investors have now come back to companies such as CVS that offer the best of both worlds: old economy fundamentals with above average growth and new economy innovation.

CVS pharmacists filled approximately 300 million prescriptions in 2000, providing pharmacy counseling to millions of customers.

America's Pharmacy Leader

    The drugstore industry remains extremely vibrant, possessing perhaps the most compelling growth demographics in all of retail—and CVS is America's #1 Pharmacy. With 4,133 locations, we operate more drugstores than any other company in the U.S. Our pharmacy business continues to register phenomenal same store sales growth, up nearly 18% in 2000. In fact, more prescriptions are filled at CVS/pharmacy than at any other retailer. The $140 billion pharmacy industry will continue to be among the fastest-growing segments of the retail sector, driven by the introduction of new drugs and the aging American population. We continue to capture an increasing share of this expanding market.
    Our front-end business also continues to thrive, achieving broad-based category growth. We gained market share in all core categories, including photo, skin care, hair care, candy, cold and stomach remedies, diet/nutrition and cosmetics.

Thomas M. Ryan	Chairman of the Board, President and Chief Executive Officer

Our unique photo offerings, which integrate our in-store photo processing business with digital uploads onto the Kodak Picture Center® at CVS.com, have generated excellent results. In 2000, we became the #1 online photo provider in the U.S.
    We are very enthusiastic about the benefits we can derive from greater customer loyalty through our new relationship marketing program, ExtraCare®. We recently rolled out our ExtraCare card chainwide and expect to create superior value for our customers, unmatched by competitors' programs.

Growing by Remaining Focused on Our Vision

    To achieve our objective of being the most customer-focused, innovative and convenient healthcare retailer in America, we have concentrated our efforts on building our presence in the nation's top drugstore markets. We have added our traditional CVS/pharmacy stores, through organic growth or strategic acquisitions, and developed new channels, such as ProCare and CVS.com, to meet the needs of all our customers.
    CVS currently enjoys the #1 or #2 market share in 75% of the top markets in which we operate. We have a presence in 59 of the top 100 U.S. drugstore markets, which leaves 41 of the top 100 markets for CVS' possible expansion, many of which are underserved and offer tremendous potential.
    During 2000, we opened or relocated 388 stores. These included new CVS and ProCare stores in current and new markets as well as relocations of existing units to more convenient sites. We also took advantage of opportunities to expand into markets that we identified as having strong fundamentals for drugstores. We recently entered the Chicago market, currently the 2nd largest drugstore market in the U.S., and we launched an aggressive expansion into several Florida markets, beginning with Tampa, the 16th largest drugstore market, and Orlando, the 27th largest. In February 2001 we announced plans to build CVS/pharmacy stores in two of the fastest-growing drugstore markets in the U.S.—Phoenix, Arizona and Las Vegas, Nevada. We will announce our intentions to enter several new markets each year, but at a pace that will allow us to sustain our strong earnings growth progression.
    Our 1997 acquisition of Revco D.S. Inc. and our 1998 acquisition of Arbor Drugs, Inc. provided us with leadership in new markets, earnings accretion and incremental upside potential. Both companies have been fully integrated—from a systems, people and operational perspective—and are performing very well. Additionally, the businesses we acquired have become important sources of idea generation for further enhancing the performance of the entire company.

CVS ProCare: #1 in a Fast-Growing Industry

    One of our successful new channels, CVS ProCare, has grown to become an important complement to our core CVS drugstore chain by enabling us to reach a new customer segment with specialized pharmacy needs.

We now operate 46 CVS ProCare specialty pharmacies across the U.S., serving customers requiring complex and expensive prescription therapies.

We introduced our first CVS ProCare apothecaries in 1999 and, during 2000, accelerated the expansion of this business through our acquisition of Stadtlander Pharmacy, a leading specialty pharmacy company, and the addition of new ProCare locations. The acquisition of Stadtlander provided CVS with the nation’s largest specialty retail/mail business. ProCare is now the #1 player in the highly fragmented, rapidly growing, $14 billion market for patients requiring complex and expensive drug therapies for long-term health conditions—and the only specialty pharmacy player with integrated retail and mail order services. We expect the addition of Stadtlander to help propel ProCare to a $2+ billion business within three to four years.
    Our expansion of ProCare parallels, in many respects, the growth we have achieved over the years with our PharmaCare subsidiary. Designed to meet the needs of a specific customer audience—managed care organizations—PharmaCare has become one of the top pharmacy benefit management companies (PBMs) in the nation, currently managing more than 9 million lives. Through its proprietary systems and services, PharmaCare has enabled the managed care community to provide its members with the best healthcare in the most cost-effective manner, while assuring CVS’ presence in this growing segment of the healthcare industry.

CVS.com: A Winning "Clicks and Mortar" Strategy

    CVS.com has provided us with a new vehicle to enhance the convenience and value we offer customers…on the corner, on the phone, and on the web.

More than 90% of customers who use CVS.com in our markets choose to pick up their prescriptions in our stores, confirming the strength of our “clicks and mortar” format.

Through unique partnerships with healthcare leaders, we are providing a level of healthcare information and services unmatched by our competitors, backed by the trusted CVS brand name. The strength of the "clicks and mortar" drugstore format is evidenced by the fact that approximately 70% of CVS.com's pharmacy customers choose in-store pickup. In markets where we have CVS/pharmacy stores, more than 90% choose in-store pickup. We are continuing to drive growth in the business, and we expect CVS.com to be profitable by no later than 2002.

CVS' Strong Outlook

    I believe CVS is better positioned than at any time in the Company's history to capitalize on the significant opportunities in healthcare. We are optimistic that we can achieve our targets for top-line and bottom-line growth while we continue to invest for the future. CVS is the leading player in an industry that is itself vibrant and growing. We have dynamic and expanding businesses in multiple segments of the retail healthcare industry, proven strategies in place, and a solid financial position. Our investments in new technology, such as the EPIC pharmacy system and our Assisted Inventory Management program, are expected to have a positive impact on efficiency and profitability. And, we expect to reap the benefits of our participation in the Worldwide Retail Exchange (WWRE) through better communications and streamlined ordering processes with our suppliers. CVS was a founding member of the WWRE, which has grown to encompass 53 companies representing more than $700 billion in combined retail revenue.
    CVS' success in 2000 was directly attributable to the hard work and commitment of our 100,000 colleagues, and I want to thank each of them for their contributions. We also appreciate the wise counsel of our Board of Directors and the loyal support of our business partners and customers. We thank you, our shareholders, for your continued confidence in CVS, and we look forward to reporting on our future successes.

Thomas M. Ryan
Chairman of the Board,
President and Chief Executive Officer