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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
CVS CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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[X] No fee required.
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
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was paid previously. Identify the previous filing by registration statement
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Notes:
[LOGO OF CVS]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 18, 2001
10:00 A.M.
CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
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To our stockholders:
We are pleased to invite you to attend our 2001 annual meeting of
stockholders to:
. Elect 11 directors;
. Approve an amendment to the Company's 1997 Incentive Compensation Plan
increasing the number of shares authorized for issuance under the Plan
by 19.5 million shares;
. Ratify the appointment of KPMG LLP as independent auditors for 2001; and
. Conduct other business properly brought before the meeting.
Stockholders of record at the close of business on February 22, 2001 may
vote at the meeting.
Your vote is important. Whether or not you plan to attend the meeting,
please sign, date and return the enclosed proxy card in the envelope provided.
Instructions are included on your proxy card. You may change your vote by
sending in a signed proxy card with a later date or by attending the meeting
and voting in person.
By Order of the Board of Directors,
Thomas M. Ryan
Chairman of the Board, President and Chief Executive Officer
PROXY STATEMENT TABLE OF CONTENTS
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Page
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Information about the Annual Meeting and Voting......................... 1
Item 1: Election of Directors.......................................... 4
Biographies of our Board Nominees.............................. 4
Committees of the Board of CVS................................. 6
Director Compensation.......................................... 7
Compensation Committee Interlocks and Insider Participation.... 7
Share Ownership of Directors and Certain Executive Officers.... 8
Share Ownership of Principal Stockholders...................... 9
Management Planning and Development Committee Report on
Executive Compensation......................................... 10
Summary Compensation Table..................................... 14
Stock Options.................................................. 16
Stock Performance Graph........................................ 17
Certain Executive Arrangements................................. 18
Transactions with Directors and Officers....................... 20
Item 2: Approval of Increase in Shares Authorized for Issuance Under
Our 1997 Incentive Compensation Plan........................... 20
Item 3: Ratification of Appointment of Independent Auditors............ 27
Item 4: Other Matters.................................................. 27
Audit Committee Report......................................... 28
Section 16(a) Beneficial Ownership Reporting Compliance........ 28
Proxy Solicitation............................................. 28
Stockholder Proposals for Annual Meeting in 2002............... 29
Exhibit A--Amendment to the 1997 Incentive Compensation Plan
i
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
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The Board of Directors of CVS Corporation is soliciting your proxy to vote at
our 2001 annual meeting of stockholders (or at any adjournment of the meeting).
This proxy statement summarizes the information you need to know to vote at the
meeting.
We began mailing this proxy statement and the enclosed proxy card on or about
March 14, 2001 to all stockholders entitled to vote. The CVS 2000 Annual
Report, which includes our financial statements, is being sent with this proxy
statement.
Date, time and place of meeting
Date: April 18, 2001
Time: 10:00 a.m.
Place: One CVS Drive
Woonsocket, Rhode Island
Shares entitled to vote
Stockholders entitled to vote are those who owned CVS common stock or
Series One ESOP convertible preference stock (referred to throughout this
proxy statement as the "ESOP preference stock") at the close of business on
the record date, February 22, 2001. As of the record date, there were
approximately 392.8 million shares of common stock and approximately 5.0
million shares of ESOP preference stock outstanding. All ESOP preference
stock is held by The Bank of New York, as Trustee under the CVS Corporation
and Subsidiaries Employee Stock Ownership Plan (the "ESOP").
Each share of CVS common stock that you own entitles you to one vote.
Each share of ESOP preference stock is entitled to the number of votes
equal to the number of shares of common stock into which the share of ESOP
preference stock could be converted on the record date, rounded up to the
next tenth of a share (currently 2.3 votes). The ESOP preference stock is
entitled to vote on all matters submitted to a vote of holders of common
stock, voting with the common stock as a single class. Each participant in
the ESOP instructs the Trustee of the ESOP how to vote his or her shares.
As to unallocated shares and shares with respect to which the Trustee
receives no timely voting instructions, the Trustee, pursuant to the ESOP
Trust Agreement, votes these shares in the same proportion as it votes all
the shares as to which it has received timely voting instructions.
Voting your proxy
Whether or not you plan to attend the annual meeting, we urge you to
complete, sign and date the enclosed proxy card and return it promptly in
the envelope provided. Returning the proxy card will not affect your right
to attend the meeting and vote.
The enclosed proxy card indicates the number of shares that you own.
Voting instructions are included on your proxy card. If you properly
fill in your proxy card and send it to us in time to vote, one of the
individuals named on your proxy card (your "proxy") will vote your shares
as you have directed. If you sign the proxy card but do not make specific
choices, your proxy will follow the Board's recommendations and vote your
shares:
. "FOR" the election of all 11 nominees for director (as described on
page 4);
. "FOR" approval of an amendment to the Company's 1997 Incentive
Compensation Plan increasing the number of shares authorized for
issuance under the Plan by 19.5 million shares (as described on page
20); and
. "FOR" the ratification of the appointment of KPMG LLP as the
Company's independent auditors for fiscal 2001 (as described on page
27).
If any other matter is presented at the meeting, your proxy will vote in
accordance with his or her best judgment. At the time this proxy statement
went to press, we knew of no other matters to be acted on at the meeting.
Revoking your proxy
You may revoke your proxy by:
. sending in another signed proxy card with a later date;
. notifying our Secretary in writing before the meeting that you have
revoked your proxy; or
. voting in person at the meeting.
Voting in person
If you plan to attend the meeting and vote in person, we will give you a
ballot when you arrive. However, if your shares are held in the name of
your broker, bank or other nominee, you must bring an account statement or
letter from the nominee indicating that you were the beneficial owner of
the shares on February 22, 2001, the record date for voting.
Appointing your own proxy
If you want to give your proxy to someone other than the individuals
named as proxies on the proxy card, you may cross out the names of those
individuals and insert the name of the individual you are authorizing to
vote. Either you or that authorized individual must present the proxy card
at the meeting.
Quorum requirement
A quorum of stockholders is necessary to hold a valid meeting. The
presence in person or by proxy at the meeting of holders of shares
representing a majority of the votes of the common stock and the ESOP
preference stock entitled to vote constitutes a quorum. Abstentions and
broker "non-votes" are counted as present for establishing a quorum. A
broker non-vote occurs on an item when a broker is not permitted to vote on
that item absent instruction from the beneficial owner of the shares and no
instruction is given.
2
Vote necessary to approve proposals
Item Vote Necessary*
Item 1: Election of directors Directors are elected by a plurality of the
votes represented by the shares of common stock
and ESOP preference stock present at the meeting
in person or by proxy, voting as a single class.
This means that the director nominee with the
most affirmative votes for a particular slot is
elected for that slot. Only the number of votes
"for" and "against" affect the outcome. Withheld
votes and abstentions have no effect on the
vote.
Item 2 Approval of an amendment Approval is by affirmative vote of a majority of
increasing the number of the votes represented by the shares of common
shares authorized for stock and the ESOP Preference Stock present at
issuance under our 1997 the meeting in person or by proxy, voting as a
Incentive Compensation single class. Abstentions are counted and have
Plan the effect of a vote against.
Item 3 Ratification of Same as Item 2.
appointment of
independent auditors
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* Under New York Stock Exchange rules, if your broker holds your shares in its
name, your broker is permitted to vote your shares on Items 1, 2 and 3 even
if it does not receive voting instructions from you.
3
ITEM 1: ELECTION OF DIRECTORS
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Our Board of Directors has nominated 11 directors for election at the
annual meeting. Each nominee is currently serving as one of our directors.
If you re-elect them, they will hold office until the next annual meeting
or until their successors have been elected and qualified.
Your proxy will vote for each of the nominees unless you specifically
withhold authority to vote for a particular nominee. If any nominee is
unable to serve, your proxy may vote for another nominee proposed by the
Board or the Board may reduce the number of directors to be elected.
During 2000, there were eight meetings of the Board of Directors of CVS.
Each director attended at least 75% of the meetings of the Board and of
committees of which he or she was a member.
The Board of Directors recommends the ELECTION of all nominees.
Biographies of our Board Nominees
Eugene Applebaum Director since 1998 Age
64
Mr. Applebaum has been President of Arbor Investments Group, L.L.C., a
consulting firm, since April 1998. From 1963 to March 1998, he was President of
Arbor Drugs, Inc. ("Arbor") and its predecessors, and from 1985 until Arbor was
acquired by CVS in March 1998, he was Arbor's Chairman of the Board and Chief
Executive Officer. Mr. Applebaum was first elected to CVS' Board of Directors
pursuant to an agreement to elect him undertaken in the CVS/Arbor merger
agreement.
W. Don Cornwell Director since 1994 Age
53
Mr. Cornwell has been Chairman of the Board and Chief Executive Officer of
Granite Broadcasting Corporation, a group broadcasting company, since February
1988. Mr. Cornwell is a director of Pfizer, Inc., The Telecommunications
Development Fund, DeWitt Wallace-Reader's Digest Fund, Hershey Trust Company
and Milton Hershey School.
Thomas P. Gerrity Director since 1995 Age
59
Mr. Gerrity has been Professor of Management at The Wharton School of the
University of Pennsylvania since 1990 and Director of The E-Commerce Forum at
The Wharton School since July 1999. From 1990 to June 1999, he also served as
Dean of The Wharton School. Mr. Gerrity is a director of Fannie Mae, Reliance
Group Holdings, Inc., Sunoco, Inc., Knight-Ridder, Inc., and Internet Capital
Group, Inc., and is a trustee of the MAS Funds.
Stanley P. Goldstein Director since 1984 Age
66
Mr. Goldstein is a retired founder of CVS. From January 1987 to April 1999, Mr.
Goldstein was Chairman of the Board of the Company, and from January 1987 to
May 1998, he was Chief Executive Officer of the Company. Mr. Goldstein is a
director of Linens 'n Things, Inc. and Footstar, Inc.
Marian L. Heard Director since 1999 Age
60
Ms. Heard has been President and Chief Executive Officer of the United Way of
Massachusetts Bay and Chief Executive Officer of United Ways of New England,
each a social service agency, since February 1992. Ms. Heard is a director of
Blue Cross & Blue Shield, FleetBoston Financial Corporation, Liberty Mutual
Insurance Company, Emerson Investment Management, Inc. and The New England
Aquarium, and is a trustee of the Dana-Farber Cancer Institute.
4
William H. Joyce Director since 1994 Age
65
Mr. Joyce has been Vice Chairman of the Board of The Dow Chemical Company, a
leading producer of chemicals and polymers, since February 2001, when Dow
acquired Union Carbide Corporation. From January 1996 to February 2001, he was
Chairman of the Board and Chief Executive Officer of Union Carbide. From
January 1993 to January 1996, he was President, Chief Operating Officer and a
director of Union Carbide.
Terry R. Lautenbach Director since 1991 Age
62
Mr. Lautenbach is retired. From 1988 to 1992, he served as Senior Vice
President of IBM Corporation, a multinational advanced information technology
company, where he was responsible for worldwide manufacturing and product
development and North American marketing and services. Mr. Lautenbach is a
director of Air Products and Chemicals Inc., Varian Associates, Inc. and
Footstar, Inc.
Terrence Murray Director since 1996 Age
61
Mr. Murray has been Chairman and Chief Executive Officer of FleetBoston
Financial Corporation and its predecessors since May 1982. Mr. Murray is a
director of A.T. Cross Company, Allmerica Financial Corporation, The Federal
Reserve Bank of Boston and Partners Healthcare Systems, Inc., a trustee of
Brigham and Women's Hospital and the Museum of Fine Arts, Boston, a trustee
emeritus of Brown University and an honorary trustee of The Rhode Island School
of Design.
Sheli Z. Rosenberg Director since 1997 Age
59
Ms. Rosenberg has been Vice Chairman of Equity Group Investments, L.L.C., a
real estate investment firm, since January 2000. From 1994 to January 2000, Ms.
Rosenberg served as President, Chief Executive Officer and a director of Equity
Group Investments. From 1980 to 1997, she was also a principal of the law firm
Rosenberg & Liebentritt, P.C. Ms. Rosenberg is a director of Anixter
International, Inc., Capital Trust, Inc., Dynergy, Inc., Manufactured Home
Communities, Inc. and Cendant Corporation, and a trustee of Equity Residential
Properties Trust and Equity Office Properties Trust.
Thomas M. Ryan Director since 1996 Age
48
Mr. Ryan has been Chairman and Chief Executive Officer of CVS Corporation and
CVS Pharmacy, Inc. since April 1999, and President of CVS Corporation and CVS
Pharmacy, Inc. since May 2000. From May 1998 to April 1999, Mr. Ryan served as
Chief Executive Officer and President of CVS Corporation, and from October 1996
to May 1998, he was Vice Chairman of the Board and Chief Operating Officer of
CVS Corporation. From January 1994 to April 1999, Mr. Ryan served as Chief
Executive Officer and President of CVS Pharmacy, Inc. Mr. Ryan is a director of
FleetBoston Financial Corporation and Reebok International Ltd.
Ivan G. Seidenberg Director since 1993 Age
54
Mr. Seidenberg has been President and Co-Chief Executive Officer of Verizon
Communications Corporation, a worldwide communications company, since June
2000, when Verizon was formed following the merger of Bell Atlantic Corporation
and GTE Corporation. From December 1998 to June 2000 Mr. Seidenberg was
Chairman and Chief Executive Officer of Bell Atlantic; from June 1998 to
December 1998, he was Vice Chairman and Chief Executive Officer of Bell
Atlantic; from August 1997 to June 1998, he was Vice Chairman, President and
Chief Operating Officer of Bell Atlantic; and from April 1995 to August 1997,
he was Chairman and Chief Executive Officer of NYNEX Corporation. Mr.
Seidenberg is a director of American Home Products Corporation, Boston
Properties, Inc., Honeywell International, Inc. and Viacom Inc.
5
Committees of the Board of CVS
Audit Committee
William H. Joyce, Chair
W. Don Cornwell
Thomas P. Gerrity
Marian L. Heard
The Audit Committee met five times during 2000. Each member of the
Committee is "independent" as defined in the listing standards of the New
York Stock Exchange, on which CVS' common stock is listed. The Board has
approved a written charter for the Committee, a copy of which was included
in our Proxy Statement for last year's Annual Meeting. The Committee: (i)
oversees the financial reporting process and internal control systems; (ii)
oversees the internal and independent audit function; (iii) oversees that
the annual consolidated financial statements and quarterly financial
statements are prepared in accordance with generally accepted accounting
principles; (iv) oversees and supervises special investigations; (v)
recommends to the Board the appointment of independent auditors and
annually evaluates the auditors' independence; (vi) reviews compliance with
the corporate code of conduct; (vii) approves our internal audit plan; and
(viii) annually reviews and assesses the adequacy of its Charter, and may
amend the Charter as appropriate with Board approval.
Nominating and Corporate Governance Committee
Sheli Z. Rosenberg, Chair
Eugene Applebaum
William H. Joyce
Marian L. Heard
Terry R. Lautenbach
The Nominating and Corporate Governance Committee met once during 2000.
Mr. Seidenberg was Chair of this Committee until CVS' 2000 Annual Meeting,
when he was replaced as Chair by Ms. Rosenberg (who had previously been on
the Committee), and upon his retirement at the 2000 Annual Meeting, Mr.
Allan Bloostein was replaced by Ms. Heard. The Committee has responsibility
for advising the Board as a whole on corporate governance matters,
developing a policy on the size and composition of the Board, reviewing
possible candidates for Board membership, performing Board evaluations and
recommending a slate of nominees. While there are no formal procedures for
stockholder recommendations, the Committee will consider nominees
recommended by stockholders.
Management Planning and Development Committee
Terry R. Lautenbach, Chair
Terrence Murray
Sheli Z. Rosenberg
Ivan G. Seidenberg (as of July 1, 2000)
The Management Planning and Development Committee (formerly known as the
Compensation and Human Resources Committee) met four times during 2000.
Following his retirement at the 2000 Annual Meeting, Mr. Allan Bloostein
was replaced on the Committee by Mr. Seidenberg effective July 1. The
Committee: (i) reviews and approves the salary, bonus and other
compensation of all officers of CVS and of each executive of CVS or its
subsidiaries whose annual base salary is greater than $200,000;
(ii) administers the 1997 Incentive Compensation Plan and any outstanding
awards under any other stock option plans of the Company and its
subsidiaries, subject to the terms of such plans; and (iii) administers any
profit incentive plans for the benefit of CVS.
6
Director Compensation
We provide the following compensation to our non-employee directors for
their services as directors:
Annual fees
. Each non-employee director receives an annual retainer of $30,000 and
attendance fees of $1,500 for each Board meeting attended, $1,000 for
each telephonic Board meeting attended and $1,000 for each committee
meeting attended.
. Each non-employee director who chairs a committee of the Board
receives an additional annual retainer of $2,500 for each committee
he or she chairs.
Director Stock Plan; Director Fees Payable in Stock
Under the 1996 Directors Stock Plan, non-employee directors receive an
annual award of 1,500 shares of common stock for their service during the
preceding year (pro rated for partial year service). Additionally, one half
of the annual non-employee director retainer fee is paid in CVS common
stock. Directors may choose to receive all retainer and attendance fees in
common stock. A director may also choose to defer receipt of such shares.
Deferred shares are credited annually with dividend equivalents.
As of December 30, 2000, our directors had deferred receipt of shares of
common stock as follows: Mr. Applebaum, 4,255 shares; Mr. Cornwell, 6,582
shares; Mr. Gerrity, 4,609 shares; Mr. Goldstein, 2,446 shares; Ms. Heard,
1,583 shares; Mr. Joyce, 10,473 shares; Mr. Lautenbach, 10,349 shares; Mr.
Murray, 6,341 shares; Ms. Rosenberg, 4,532 shares; and Mr. Seidenberg,
10,199 shares.
Compensation Committee Interlocks and Insider Participation
Mr. Terrence Murray, Chairman and Chief Executive Officer of FleetBoston
Financial Corporation and a director of CVS, serves on CVS' Management
Planning and Development Committee, which oversees executive compensation.
Mr. Thomas Ryan, Chairman, President and Chief Executive Officer and a
director of CVS, serves on the Board of Directors of FleetBoston, but does
not serve on FleetBoston's Compensation Committee.
7
Share Ownership of Directors and Certain Executive Officers
The following table shows the share ownership, as of January 19, 2001,
of each director, each executive officer named in the Summary Compensation
Table appearing on page 14 and all directors and executive officers as a
group, based on information provided by these individuals. Each individual
(except Mr. Applebaum, if shares relating to a forward purchase contract
(described in note 8 to the table below) are included in the calculation)
beneficially owns less than 1% of our common stock and, except as described
in the footnotes to the table, each person has sole investment and voting
power over the shares.
Ownership of Common Stock(/1/)
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Name Number Percent
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Eugene Applebaum 7,323,530 (/1/)(/5/)(/8/) 1.86%
W. Don Cornwell 8,335 (/1/)(/5/) *
Thomas P. Gerrity 39,254 (/1/)(/5/) *
Stanley P. Goldstein 1,590,813 (/1/)(/3/)(/5/)(/6/) *
Marian L. Heard 717 (/5/) *
William H. Joyce 8,943 (/1/)(/5/) *
Terry R. Lautenbach 41,630 (/1/)(/5/) *
Larry J. Merlo 447,187 (/1/)(/2/)(/3/)(/4/) *
Terrence Murray 10,028 (/5/)(/7/) *
David B. Rickard 88,408 (/2/)(/4/) *
Sheli Z. Rosenberg 15,531 (/5/) *
Thomas M. Ryan 1,695,528 (/1/)(/2/)(/3/)(/4/) *
Ivan G. Seidenberg 9,240 (/1/)(/5/) *
Douglas A. Sgarro 117,804 (/1/)(/2/)(/3/)(/4/) *
Larry J. Zigerelli 112,084 (/1/)(/2/)(/4/) *
All directors and 11,649,410 (/1/)(/2/)(/3/)(/4/)(/5/) 2.95%
executive officers (/6/)(/7/)(/8/)
as a group (17 persons)
* Less than 1%.
(1) Includes shares of common stock not currently owned, but subject to
options which were outstanding on January 19, 2001 and were
exercisable within 60 days thereafter: Mr. Applebaum, 50,000; Mr.
Cornwell, 6,930; Mr. Gerrity, 4,620; Mr. Goldstein, 1,274,972; Mr.
Joyce, 6,930; Mr. Lautenbach, 13,860; Mr. Merlo, 298,416; Mr. Ryan,
1,222,452; Mr. Seidenberg, 9,240; Mr. Sgarro, 47,396; Mr. Zigerelli,
15,000; and all directors and executive officers as a group,
3,048,667.
(2) Includes shares of common stock granted under the Company's 1997
Incentive Compensation Plan which remain subject to certain
restrictions as to continued employment and transfer as provided in
such plans: Mr. Ryan, 332,201; Mr. Rickard 77,892; Mr. Merlo,
119,105; Mr. Zigerelli, 89,568; Mr. Sgarro, 63,407; and all executive
officers as a group, 717,063.
(3) Includes shares of common stock receivable upon the lapse of
restrictions on restricted stock or the exercise of options but
deferred pursuant to the Company's Deferred Stock Compensation Plan:
Mr. Ryan, 79,641 shares; Mr. Goldstein, 44,761 shares; Mr. Merlo,
14,690 shares; Mr. Sgarro 813 shares; and all directors and executive
officers as a group, 141,103.
(4) Does not include 5.0 million shares of ESOP preference stock held as
of January 19, 2001 by the ESOP, which was established in 1989. As of
December 31, 2000, the last date on which an allocation was made,
shares had been allocated as follows: Mr. Ryan, 1,065 shares; Mr.
Rickard, 21 shares; Mr. Merlo, 724 shares; Mr. Zigerelli, 40 shares;
Mr. Sgarro, 102 shares; and all executive officers as a group, 2,315
shares.
(5) Does not include the following shares of common stock constituting
deferred non-employee director compensation: Mr. Applebaum, 4,255
shares; Mr. Cornwell, 6,582 shares; Mr. Gerrity, 4,609 shares; Mr.
Goldstein, 2,446 shares; Ms. Heard, 1,583 shares; Mr. Joyce, 10,473
shares; Mr. Lautenbach, 10,349 shares; Mr. Murray, 6,341 shares; Ms.
Rosenberg, 4,532 shares; Mr. Seidenberg, 10,199 shares; and all non-
employee directors as a group, 61,369.
(6) Includes 40,000 shares held by Mr. Goldstein's wife and 10,000 shares
held by a limited partnership, the general partner of which is a
corporation owned by Mr. Goldstein and his wife, and the limited
partners of which are the Goldsteins' adult sons. Mr. Goldstein
disclaims beneficial ownership of these shares.
(7) Includes 2,670 shares held by a charitable foundation and 740 shares
held by a family-related limited liability company of which Mr.
Murray holds a membership interest. Mr. Murray disclaims beneficial
ownership of these shares.
8
(8) Includes 7,273,530 shares beneficially owned by Mr. Applebaum as
Trustee for the Eugene Applebaum Revocable Living Trust (the "Trust")
and pledged as security relating to a forward purchase contract
obligating the Trust to deliver cash or up to that number of shares
on or about May 15, 2001.
Share Ownership of Principal Stockholders
We have been notified by the persons in the following table that they
were the beneficial owners (as defined by the rules of the SEC) of more
than five percent of our voting securities as of February 22, 2001.
According to the most recent Schedule 13G filed by the owner with the SEC,
these shares were acquired in the ordinary course of business, and were not
acquired for the purpose of, and do not have the effect of, changing or
influencing control over us.
No. of shares
Name and Address of beneficially Percent of
Title of Class Beneficial Owner owned class owned (/1/)
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Common stock FMR Corp. (/2/) 28,319,617 7.21%
82 Devonshire Street
Boston, MA 02109
Common stock Massachusetts Financial Services Co. (/3/) 28,057,402 7.14%
500 Boylston Street
Boston, MA 02116
Series One ESOP CVS Corporation and Subsidiaries 5,000,257 100%
convertible Employee Stock Ownership Plan Trust
preference stockc/o Bank of New York, as Trustee
48 Wall Street
New York, NY 10005
(1) This calculation is based on all outstanding shares of common stock
and ESOP preference stock as of February 22, 2001. FMR Corp.,
Massachusetts Financial Services Co. and the ESOP own shares
representing approximately 7.0%, 6.94% and 2.84%, respectively, of
the total votes represented by CVS' voting securities (i.e., the
common stock and ESOP Preference Stock voting as a single class).
(2) Information based on Schedule 13G dated February 13, 2001. FMR Corp.,
a parent holding company, and/or its subsidiaries have sole voting
power with respect to 418,464 of such shares and sole dispositive
power over all of these shares.
(3) Information based on Schedule 13G dated February 12, 2001.
Massachusetts Financial Services Co. has sole voting power with
respect to 27,883,456 of such shares and sole dispositive power over
all of these shares, some of which are also beneficially owned by
certain non-reporting entities.
9
Management Planning and Development Committee Report on Executive Compensation
The Management Planning and Development Committee of the Board of
Directors (formerly known as the Compensation and Human Resources
Committee; for purposes of this report, the "Committee") is composed of
four directors, none of whom is an officer or employee of CVS or its
subsidiaries. The Committee is responsible for the establishment of
policies governing, and for the implementation, administration and
interpretation of, all aspects of executive officer compensation. The
Committee, along with all outside directors, meets independently annually
to review the results against goals and performance of the Chairman,
President and Chief Executive Officer, Mr. Ryan. The Committee has prepared
the following report on the executive compensation program in which
executive officers, including those named in the Summary Compensation Table
on page 14 (the "named executive officers"), participate.
Compensation Policies
The Committee reviews the compensation of executive officers on an
ongoing basis, developing and implementing plans to serve the following
objectives:
. Support, communicate and drive achievement of CVS' business
strategies and goals;
. Attract and retain the highest caliber executive officers by
providing compensation opportunities comparable to those offered by
other companies with which CVS competes for business and talent;
. Motivate high performance among executive officers in an
entrepreneurial incentive-driven culture;
. Closely align the interests of executive officers with stockholders'
interests; and
. Reward results achieved short-term and, in the long-term,
stockholder value creation.
The Committee intends that executive officer compensation be determined
and administered on the basis of total compensation, rather than on
separate free-standing components. The Committee has sought to create an
integrated total compensation program structured to balance appropriately
CVS' short- and long-term business and financial strategic goals. A
significant amount of total pay for executive officers is comprised of at-
risk pay to align executive interests with stockholder interests and
directly tie compensation value to performance.
In 2000, the Committee engaged a compensation consulting firm to assist
it in the ongoing administration of an executive compensation program for
the key CVS management group. The consulting firm analyzed market data and
best practices for the key management group, including Mr. Ryan and the
other named executive officers. Their salaries and other compensation
awards were compared to a core peer group, as well as industry standards,
in order to recommend compensation programs and policies that would reflect
and enhance CVS' high-growth strategy. This comparison included
compensation levels reported for senior executives of 21 consumer goods
companies, including 11 retailers (two of which are drug chains), with
sales ranging from approximately $7 billion to $38 billion. Ten of the
companies in this survey group are included in the S&P Retail Stores
Composite Index used in the Stock Performance Graph on page 17. The 2000
compensation program for CVS' named executive officers resulted from the
Committee's review of this information.
For 2000, executive officer compensation consisted of base salaries,
cash bonuses based on annual performance, long-term performance shares and
stock options. In addition, in March 2000 the Committee approved the
implementation of the CVS Executive Retention Program, pursuant to which
restricted stock that vests on the fourth anniversary of the date of grant
based on continued employment was issued to each of the named executive
officers. The restricted stock granted represents 50% of the total award;
the balance of the award will be paid in cash upon the vesting of such
stock. Mr. Ryan's restricted stock award
10
under the Program was 183,717 shares. For additional information regarding
this Program see the Summary Compensation Table on page 14. Total
compensation levels for 2000 generally were targeted at the 75th percentile
of compensation paid by comparable companies in the survey group. In any
one year or period of years, however, actual total compensation levels of
executive officers may range well below or above a targeted level based on
performance against annual and long-term business objectives and total
return to stockholders.
Base Salaries
The Committee periodically reviews base salaries and considers increases
based on corporate profitability, competitive salaries, position
responsibility levels and individual qualifications and performance. In
2000, as part of the overall review of the CVS compensation program,
salaries of most of the executive officers were increased in light of
market data, as well as to provide merit increases and to reflect
promotions and increased responsibilities. The Committee generally sought,
through these increases, to place such salaries in the range between the
50th and 75th percentile of base salaries in the survey group. Effective
April 1, 2000, salaries for Messrs. Ryan, Rickard, Merlo, Zigerelli and
Sgarro were $975,000, $595,000, $495,000, $475,000 and $375,000,
respectively.
Annual Incentive Awards
CVS maintains an annual incentive plan that rewards corporate employees
based on performance relative to predetermined objectives established for
the year. The annual incentive paid to each participant under this program
for 100% performance relative to annual objectives is known as the "Normal
Award." In 2000, Normal Awards payable in cash (subject to elective
deferral) were 125% of base salary for Mr. Ryan and up to 90% of base
salary for the other named executive officers. The annual incentive plan
provides for larger awards if performance exceeds predetermined objectives
and smaller or no awards if performance falls below such objectives.
For 2000, the Committee determined Mr. Ryan's incentive awards based on
pre-established objectives for CVS' consolidated earnings before federal
income taxes ("EBIT") and return on net assets ("RONA"). Based on such
returns and the Committee's conclusion that the objectives relating to such
strategic goals were met, Mr. Ryan's annual incentive was payable at 111%
of his Normal Award for 2000. In addition to his regular cash incentive
determined based on the above EBIT and RONA objectives, the Committee also
made an incremental cash award to Mr. Ryan in recognition for his
contribution to CVS' 2000 earnings per share performance. Consequently, Mr.
Ryan's annual cash incentive was payable at approximately 131% of his
normal award for 2000. This amount is reflected in the bonus column of the
Summary Compensation Table for Mr. Ryan.
Annual incentive awards for 2000 payable to other named executive
officers were based on the same EBIT and RONA objectives. Accordingly,
annual incentives for the other named executive officers were generally
payable at a rate of 111% of the Normal Award for 2000. These amounts are
reflected in the bonus column of the Summary Compensation Table for Messrs.
Rickard and Sgarro. For Messrs. Merlo and Zigerelli, in addition to their
regular cash incentive determined based on the above EBIT and RONA
objectives, the Committee made an incremental cash award in recognition of
their outstanding contributions to the profitability of CVS. Consequently,
Mr. Merlo's annual cash incentive was payable at approximately 122% of his
normal award for 2000, and Mr. Zigerelli's annual cash incentive was
payable at approximately 127% of his normal award for 2000. These amounts
are reflected in the bonus column of the Summary Compensation Table for
Messrs. Merlo and Zigerelli.
Stock Options
The Committee believes strongly in the use of equity-based compensation
to help reinforce executives' focus on the importance of returns to
stockholders. Therefore, the Committee has incorporated
11
equity-based incentives into the executive compensation program in several
ways. A key element of this program is stock options. In 2000, the
Committee continued its general policy of making annual stock option grants
to executives and key employees. Stock option grants to Mr. Ryan and the
other named executive officers are shown in the Summary Compensation Table
on page 14 and the Stock Option Grant Table on page 16. In 2000, the
Committee granted options to over 700 key employees below the executive
officer level. The Committee expects to continue to make annual option
grants to executive officers and key employees.
Additionally, pursuant to a stock option award program for full-time
store managers and pharmacists approved in 1999, in 2000 the Committee
approved stock option awards for over 9,000 full-time pharmacists and over
3,700 full-time store managers. Subsequent awards to full-time store
managers and pharmacists are expected to occur approximately every other
year.
Stock options awarded in 2000 to executive officers, key employees,
store managers and pharmacists generally become exercisable 50% on the
second anniversary of the grant date and 25% on each of the third and
fourth anniversaries of the grant date.
Long-Term Performance Share Plan
In 1999, CVS implemented a Long-Term Performance Share Plan. This Plan,
which is a sub-plan of the Company's 1997 Incentive Compensation Plan, is
intended to encourage executives to balance short-term goals, as reflected
in the annual incentive plan, with long-term profit growth. It uses both an
internal measure of success--earnings per share ("EPS") compound annual
growth rate--as well as an external validation of success--CVS stock price.
The Plan consists of three-year performance cycles, with a new cycle
commencing each year. At the beginning of each cycle, participants are
awarded an opportunity to earn a target dollar value. At the end of each
cycle, the actual dollar value and number of shares awarded may be higher
or lower than the target number, depending upon performance relative to a
predetermined goal of compounded annual growth in EPS. Final awards will be
paid 50% in shares of CVS stock and 50% in cash (based upon the value of
the award earned at the end of the performance cycle).
The first full performance cycle is from 1999 through 2001. This cycle
provides for target awards of $1,200,000 for Mr. Ryan, $330,000 for Messrs.
Rickard, Merlo and Zigerelli and $240,000 for Mr. Sgarro.
To provide competitive total compensation opportunities, a transitional
("bridge") cycle was implemented, covering the calendar year 2000 and
payable the first quarter of 2001. Based on EPS growth relative to the goal
established at the beginning of 2000, actual awards for this bridge cycle,
which were stated as a dollar value, were equal to 100% of target. Payments
were made 50% in CVS shares and 50% in cash. These amounts are reflected in
the "All Other Compensation" column of the Summary Compensation Table.
Partnership Equity Program
The Partnership Equity Program was implemented for key management in
1997 as a major element in CVS' executive compensation program. The Program
is designed to ensure that those executives with significant impact on the
future success of CVS have a substantial "at risk" personal equity
investment in CVS common stock. The Committee believes that the Program,
along with stock ownership guidelines for officers, will strongly link the
economic interests of key managers with each other and with CVS
stockholders, provide future long-term compensation opportunities that are
competitive in the external marketplace and that reflect internal
responsibility levels, and assure key management stability, retention,
motivation and long-term focus on corporate strategy.
12
Under the Program, more than 50 key managers of CVS, including its
executive officers, were given the opportunity in 1997 and 1998 to invest
in common stock based on their position, responsibilities and potential
impact on the creation of long-term stockholder value. The purchase price
of shares (set at fair market value at the purchase date) was payable from
each participant's personal funds, without loans or guarantees by CVS,
including by application of certain payouts from other compensation
programs. For each share purchased (up to certain approved individual
dollar limits), the Committee made a matching grant of one deferred share;
such deferred shares vest (become non-forfeitable) at the end of five years
if the participant both retains the purchased share for that period and
continues to be employed by CVS, subject to accelerated vesting in certain
events. Furthermore, the Committee granted stock options at a rate of up to
15 shares subject to option for each share purchased under the Program. The
options have an exercise price equal to fair market value on the date of
grant and vest in equal installments at the end of years three, four and
five following the grant date, again based on continued employment and
retention of the purchased shares, subject to accelerated vesting in
certain events.
In 2000, the program continued for newly hired key employees or newly
promoted senior executives. Prior year participants continue to have awards
vest under the program, but no additional personal contributions or awards
were made.
The Committee does not consider stock holdings, prior option or
restricted stock grants, or the appreciation on those holdings or grants
when making option, restricted stock, Partnership Equity Program or Long-
Term Performance Share Plan award determinations.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation over $1 million paid to a
company's chief executive officer and the four other most highly
compensated executive officers at year end. Qualifying performance-based
compensation will not be subject to the deduction limit if certain
requirements are met.
The Committee's policy is to preserve corporate tax deductions by
qualifying compensation paid over $1 million to named executive officers as
performance-based compensation. To this end, in 1997 the Board adopted and
stockholders approved the 1997 Incentive Compensation Plan, which permits
annual incentive awards and stock options (and certain other awards) to
qualify as performance-based compensation not subject to the limitation on
deductibility. The Committee believes that stock options granted under
prior plans also qualify as performance-based compensation under Section
162(m), and other steps such as deferral arrangements can be used to avoid
or minimize any loss of deductibility. Nevertheless, maintaining tax
deductibility is but one consideration among many--and is not the most
important consideration--in the design of the compensation program for
senior executives. The Committee may, from time to time, conclude that
compensation arrangements are in the best interest of CVS and its
stockholders despite the fact that such arrangements might not, in whole or
in part, qualify for tax deductibility. Mr. Allan Bloostein was a member of
the Committee until his retirement from the Board of Directors in April
2000.
Terry R. Lautenbach, Chair Sheli Z. Rosenberg
Terrence Murray Ivan G. Seidenberg
13
Summary Compensation Table
The following Summary Compensation Table shows information about the
compensation received by CVS' Chief Executive Officer and each of the four
other most highly compensated executive officers of CVS during the 2000
fiscal year for services rendered to the Company in all capacities during
the three fiscal years ended December 30, 2000.
Long Term Compensation
Annual Compensation Awards
------------------- ---------------------------
Restricted
Stock Securities All Other
Name and Principal Awards Underlying Compensa-
Position(s) Year Salary($) Bonus($) ($) (/1/) Options(#) (/2/) tion($) (/3/)
---------------------------------------------------------------------------------------------
Thomas M. Ryan 2000 975,000 1,600,000 5,500,000 200,000 1,209,395
Chairman of the Board,
President 1999 956,250 1,850,000 -- 150,000 1,510,483
and Chief Executive
Officer 1998 900,000 1,103,250 3,485,438 795,660 12,148
David B. Rickard (/4/) 2000 590,000 592,102 2,000,000 40,000 356,095
Executive Vice
President and 1999 191,667 792,448 450,000 125,760 450,000
Chief Financial Officer 1998 -- -- -- -- --
Larry J. Merlo 2000 488,750 543,000 2,500,000 40,000 358,123
Executive Vice
President-- 1999 465,000 725,000 -- 25,000 459,862
Stores 1998 450,000 321,200 737,325 165,220 11,887
Larry J. Zigerelli (/5/) 2000 456,250 543,000 2,500,000 40,000 359,310
Executive Vice
President-- 1999 362,500 551,268 300,000 75,210 616
Marketing 1998 -- -- -- -- --
Douglas A. Sgarro 2000 368,750 310,978 1,500,000 30,000 255,688
Senior Vice President-- 1999 350,000 375,169 124,950 20,000 7,005
Administration and
Chief 1998 341,250 208,250 170,400 43,470 4,519
Legal Officer
President--CVS Realty
Co.
(1) Recipients of restricted stock grants typically forfeit such stock if they
cease to be employees of CVS prior to vesting, subject to accelerated
vesting in certain events. Based on the number of shares of restricted
stock held at the end of a period, dividends are paid at the same rate as
paid to all stockholders from the date of the award. All disclosed
restricted stock awards currently outstanding are either (i) performance-
based restricted stock which is contingent upon meeting one year
performance objectives and subject to a three-year holding period from the
date of grant, (ii) restricted stock that vests over a three year-period
based on continuing employment, (iii) matching restricted stock units that
vest on the fifth anniversary of the date of the grant based on continuing
employment, or (iv) restricted stock awarded pursuant to the CVS Executive
Retention Program that vests on the fourth anniversary of the date of
grant based on continued employment. In March 2000, as part of the newly
adopted CVS Executive Retention Program, grants of 183,717; 66,806;
83,508; 83,508 and 50,105 restricted shares were made to Messrs. Ryan,
Rickard, Merlo, Zigerelli and Sgarro, respectively. These restricted share
amounts were determined based on the fair market value of CVS common stock
on March 7, 2000 ($29.9375). The restricted shares represent 50% of each
award; the balance of each award will be paid in cash upon the vesting of
the restricted shares. The following persons' aggregate holdings of
restricted stock had a fair market value as follows (based on a per share
price of $60.0938, the average of the high and low sale prices of the
common stock as reported by the New York Stock Exchange on December 29,
2000, the last trading day of our fiscal year): Mr. Ryan, 332,201
restricted shares having a market value of $19,963,220, Mr. Rickard,
77,892 restricted shares having a market value of $4,680,826, Mr. Merlo,
119,015 restricted shares having a market value of $7,152,064; Mr.
Zigerelli, 89,568 restricted shares having a market value of $5,382,481;
and Mr. Sgarro, 63,407 restricted shares having a market value of
$3,810,368.
14
(2) Options outstanding have been adjusted to account for CVS' two-for-one
stock split on June 15, 1998. Options granted in 2000 to Messrs. Ryan,
Rickard, Merlo, Zigerelli and Sgarro will become exercisable in three
annual installments beginning on the second anniversary of the grant;
options granted in 1999 to Messrs. Ryan, Merlo, Zigerelli and Sgarro will
become exercisable in three annual installments beginning on the second
anniversary of the grant; options granted in 1999 to Mr. Rickard will
become exercisable in three annual installments beginning on the third
anniversary of the grant date; options granted in 1998 to Messrs. Ryan,
Merlo and Sgarro will become exercisable in three annual installments
beginning on the third anniversary of the grant.
(3) For 2000 this amount includes the following: $3,400, $3,500, $2,550,
$1,750 contributed under CVS' 401(k) cash match to the 401(k) Profit
Sharing Plan for Messrs. Ryan, Merlo, Zigerelli and Sgarro, respectively;
an estimated 18.338 ESOP shares based on a value of $139.057 per share
(total value $2,550) for the ESOP match to the 401(k) Profit Sharing Plan
for Mr. Zigerelli; an estimated 21.394 ESOP shares based on a value of
$139.057 per share (total value $2,975) contributed under the ESOP for
each of the other named executive officers; and $3,020, $3,120, $1,648,
$1,235 and $963 of income in connection with life insurance premiums for
Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro, respectively. Also
includes Long-Term Performance Share Plan 2000 "bridge" period values of
$1,200,000, $350,000, $350,000, $350,000 and $250,000 for Messrs. Ryan,
Rickard, Merlo, Zigerelli and Sgarro, respectively.
(4) Mr. Rickard joined CVS in September 1999.
(5) Mr. Zigerelli joined CVS in February 1999.
15
Stock Options
Option Grants in Fiscal Year Ending December 30, 2000
The following table shows the stock options awarded to the named
executive officers in fiscal 2000.
Individual Grants (/1/)
------------------------------------------------------------
Percentage of Present
No. of Securities Total Options Value on
Underlying Granted to Date of
Options Granted Employees in Exercise Grant (/3/)
Name (#) Fiscal Year (/2/) Price($) Expiration Date ($)
---------------------------------------------------------------------------------------------
Thomas M. Ryan 200,000 2.877 38.5625 01/03/2010 2,816,000
David B. Rickard 40,000 0.576 38.5625 01/03/2010 563,200
Larry J. Merlo 40,000 0.576 38.5625 01/03/2010 563,200
Larry J. Zigerelli 40,000 0.576 38.5625 01/03/2010 563,200
Douglas A. Sgarro 30,000 0.432 38.5625 01/03/2010 422,400
(1) These options become exercisable as follows: 50% on second anniversary of
the date of grant; 25% on third and fourth anniversaries of the date of
grant.
(2) Based on options to purchase 6,964,015 shares granted to all employees
during 2000.
(3) The hypothetical present values on grant date are calculated under the
modified Black-Scholes Model, which is a mathematical formula used to
value options traded on stock exchanges. The formula considers a number
of factors in calculating an option's hypothetical present value. Factors
used to value options granted which expire on 01/03/2010 include the
stock's expected volatility rate of 26.6%, a projected dividend yield of
0.61% and a risk-free rate of return of 6.77%. All grants assume a
projected time of exercise of 7 years and a projected risk of forfeiture
rate for vesting period of 5% per annum. There is no assurance that the
hypothetical present value of the stock options reflected in this table
will be realized.
Aggregated Option Exercises in Fiscal Year Ending December 30, 2000 and Year-
End Option Values
The following table shows, for the named executive officers, the stock
options exercised during fiscal 2000 and the values of unexercised options
as of December 30, 2000.
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at at Fiscal Year-
On Exercise Realized Fiscal Year-End(#) End($) (/1/)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
-----------------------------------------------------------------------------------------------
Thomas M. Ryan 309,700 8,032,009 751,972/406,540 31,761,597/33,744,291
David B. Rickard 0 0 0/165,760 0/3,168,168
Larry J. Merlo 55,000 1,485,806 187,356/317,194 7,869,544/8,143,973
Larry J. Zigerelli 0 0 0/155,210 0/1,630,294
Douglas A. Sgarro 0 0 22,906/139,284 709,729/3,284,467
(1) The value of unexercised in-the-money options at fiscal year-end assumes
a fair market value of the common stock of $60.0938, the average of the
high and low sale prices of the common stock as reported by the New York
Stock Exchange on December 29, 2000, the last trading day of our fiscal
year. The actual amount, if any, realized upon exercise will depend upon
the market price of the common stock at the time of exercise. There is no
assurance that the value of unexercised in-the-money stock options will
be as shown above.
16
Stock Performance Graph
Comparison of Five Year Cumulative Total Stockholders' Return Among CVS, S&P
Retail Composite Index and S&P 500 Index
The following graph shows changes over the past five-year period in the
value of $100 invested in: (1) our common stock; (2) Standard & Poor's 500
Index; and (3) Standard & Poor's Retail Store Composite Index (which
includes 35 retail companies).
CVS Corporation
Comparison of Cumulative Total Return to Stockholders
December 29, 1995 through December 29, 2000
[Graphic Representation Omitted]
Year End
----------------------------- Compound Annua
1995 1996 1997 1998 1999 2000 Return Rate
---------------------------------------------------------------------------
CVS Corporation $100 $158 $264 $425 $310 $468 36.2%
S&P 500* 100 123 164 211 255 232 18.3%
S&P Retail Stores Composite* 100 117 174 290 368 310 25.4%
* Index includes CVS.
The year-end values of each investment shown in the preceding graph are
based on share price appreciation plus dividends, with the dividends
reinvested as of the last business day of the month during which such
dividends were ex-dividend. The calculations exclude trading commissions
and taxes. Total stockholder returns from each investment, whether measured
in dollars or percentages, can be calculated from the year-end investment
values shown beneath the graph.
17
Certain Executive Arrangements
Employment Agreements with Named Executive Officers
CVS has entered into employment agreements with Messrs. Ryan, Rickard,
Merlo, Zigerelli and Sgarro. The employment agreements provide for an
initial employment term of three years, automatically renewed for a one-
year term at the end of the initial term and each one-year renewal term
unless either party gives notice of non-renewal at least 180 days prior to
expiration of the then current term. The employment agreements generally
provide for payment of an annual base salary, subject to review for
increase at the discretion of the Management Planning and Development
Committee. Base salaries are, as of year-end 2000, $975,000, $595,000,
$495,000, $475,000 and $375,000 for Messrs. Ryan, Rickard, Merlo, Zigerelli
and Sgarro respectively. The employment agreements also generally provide
for (i) continued payment of base salary, target cash bonuses and other
benefits for 36 months in the case of Mr. Ryan, and for 24 months in the
case of other named executive officers (or a lump sum equal to three times
salary plus target bonuses in the case of a change in control) in the event
the executive's employment is terminated by CVS without "cause" or
voluntarily by the executive due to a "constructive termination without
cause"; (ii) non-competition for a period of 18 months subsequent to a
voluntary termination of employment if CVS elects to continue paying 50% of
the executive's base salary during such period; (iii) other restrictive
covenants including nondisclosure, non-solicitation of employees and
availability for litigation support; (iv) participation in certain benefit
plans and programs (including life insurance and medical benefits); (v)
annual and long term incentive compensation opportunities; and
(vi) deferred compensation arrangements. The employment agreements of the
named executives also provide minimum guidelines for target annual
incentive opportunity as a percent of their base salaries.
A "change in control" is defined to include a variety of events,
including significant changes in the stock ownership of CVS or a
significant subsidiary, changes in CVS' board of directors, certain mergers
and consolidations of CVS or a significant subsidiary and the sale or
disposition of all or substantially all the consolidated assets of CVS.
"Constructive termination without cause" is defined generally as demotion,
reduction in compensation, unapproved relocation in the case of Mr. Ryan
(or, in the case of other named executive officers, following a change in
control), material breach of the employment agreement by CVS, or, in the
case of Mr. Ryan, failure to extend the term of the employment agreement to
his 60th birthday. "Cause" is defined generally as a breach of the
restrictive covenants, felony convictions, or willful gross neglect or
gross misconduct resulting in material harm to CVS.
If payments under the employment agreements following a change in
control are subject to the "golden parachute" excise tax, CVS will make a
"gross-up" payment sufficient to ensure that the net after-tax amount
retained by the executive (taking into account all taxes, including those
on the gross-up payment) is the same as if such excise tax had not applied.
CVS will indemnify the executives to the fullest extent permitted by law,
including advancing expenses, and will reimburse an executive for expenses
incurred in seeking enforcement of the employment agreement if he prevails
or, after a change in control, if the executive's assertion of rights is in
good faith and not frivolous.
The employment agreement with Mr. Ryan relates to his employment as an
executive officer of CVS Corporation and CVS Pharmacy, Inc. and his
agreement to serve as a director of CVS Corporation. The employment
agreements with Messrs. Rickard, Merlo, Zigerelli and Sgarro relate to
their employment as executive officers of CVS Corporation.
Supplemental Executive Retirement Plan
CVS maintains a Supplemental Executive Retirement Plan for Select Senior
Management of the Company (the "Supplemental Retirement Plan"). The
Supplemental Executive Retirement Plan is designed to increase the
retirement benefits of selected executive employees. In connection with the
Company's restructuring during 1996, the Supplemental Retirement Plan was
amended to create a new
18
benefit formula (the "New Benefit Formula"). Under the New Benefit Formula,
executives selected for participation (including Messrs. Ryan, Rickard,
Merlo, Zigerelli and Sgarro and certain other executives) will receive an
annual benefit commencing on the later of age 55 or retirement, equal to
1.6% of a three-year average of final compensation (as defined in the
Supplemental Retirement Plan) for each year of service (including credited
years of service under the Supplemental Retirement Plan prior to amendment)
up to 30 years, or a maximum benefit of 48% of final compensation, with no
offset for any amounts provided by CVS' qualified plans, social security or
other retirement benefits. Except in the event of death or a change in
control (as defined) or as provided in the employment agreements referred
to below, no benefits are payable to an eligible executive until he or she
terminates employment. After termination of employment, benefits will be
payable (i) immediately, if the executive is age 55 or older at the time of
termination, regardless of years of service, or (ii) upon reaching age 55,
if the executive is younger than 55 at the time of termination and five or
more years of Company service were completed prior to termination.
According to the above referenced formula, Mr. Ryan had accrued an
annual benefit of $917,886 as of January 1, 2001, and the lump sum value of
such benefit was $8,918,635 based on assumptions specified in the
Supplemental Retirement Plan. In December 2000, Mr. Ryan elected to waive
his rights to $1,000,000 of that lump sum value. In lieu of the lump sum
value of $1,000,000, CVS purchased split dollar life policies on the lives
of Mr. Ryan and his wife and agreed to pay a single premium equal to
$1,000,000. CVS has retained an interest in any death benefit paid out of
these life insurance policies.
The following table shows the approximate amounts of annual retirement
income that would be payable under the New Benefit Formula to executives
covered by it based on various assumptions as to compensation and years of
service, assuming benefits are computed under a straight life annuity
formula and retirement after attaining age 55 and meeting the service
requirements.
Estimated Amount of Retirement Benefits Based on
Service
--------------------------------------------------------------
Compensation 5 Years 10 Years 15 Years 20 Years 30 Years
--------------------------------------------------------------------------------
$ 600,000 $ 48,000 $ 96,000 $144,000 $192,000 $ 288,000
$ 800,000 $ 64,000 $128,000 $192,000 $256,000 $ 384,000
$1,000,000 $ 80,000 $160,000 $240,000 $320,000 $ 480,000
$1,300,000 $104,000 $208,000 $312,000 $416,000 $ 624,000
$1,600,000 $128,000 $256,000 $384,000 $512,000 $ 768,000
$1,900,000 $152,000 $304,000 $456,000 $608,000 $ 912,000
$2,200,000 $176,000 $352,000 $528,000 $704,000 $1,056,000
Final compensation for purposes of the New Benefit Formula is the
average of the executive's three highest years of annual salary and bonus
out of the last ten years of service. For this purpose, salary and bonus
are the amounts shown in the salary and bonus columns of the Summary
Compensation Table. The estimated credited years of benefit service for
Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro as of December 31, 2000
were 25, 1, 22, 2 and 3 years, respectively. Enhanced benefits are payable
in a lump sum upon termination of employment following a change in control.
Benefits under the New Benefit Formula are generally payable in annual
installments for the life of the executive, but joint and survivors forms
of payment of equivalent actuarial value may be elected.
19
Transactions with Directors and Officers
In connection with the CVS/Arbor merger, in March 1998 CVS entered into
a five year consulting agreement with Mr. Eugene Applebaum, the former
Chairman and Chief Executive Officer of Arbor and a present director of
CVS. Under the consulting agreement, Mr. Applebaum provides consulting
services to CVS with respect to certain real estate matters and other
mutually agreeable matters. For his services, Mr. Applebaum receives
consulting fees of $450,000 per year. Mr. Applebaum also receives a payment
of $25,000 upon the opening, relocation or acquisition of each store in
Michigan or the Toledo metropolitan area during the term of the agreement.
Additionally, during the term of the agreement, CVS provides office space,
secretarial and support services, and a U.S. automobile comparable to those
provided by Arbor to Mr. Applebaum at the time of the merger. CVS also
reimburses Mr. Applebaum for all reasonable business expenses incurred by
him in connection with carrying out CVS' business. Pursuant to the
consulting agreement, CVS paid for health insurance benefits available to
Mr. Applebaum and his spouse under his Arbor change in control agreement
for two years after the CVS/Arbor merger (through March 31, 2000).
Thereafter, CVS has continued and will continue to provide such health
insurance benefits to Mr. Applebaum and his spouse until their deaths, but
Mr. Applebaum and his spouse have been and will be responsible for the
costs of maintaining such coverage. CVS has agreed to indemnify and hold
Mr. Applebaum harmless against all cost, expense, liability and loss
relating to his consulting services, to the same extent as CVS indemnifies
its other directors and senior executive officers.
In addition, Messrs. Eugene and Lawrence Goldstein, the sons of Stanley
Goldstein, a director of the Company, each own minority interests in
entities involved in the lease or development of five CVS drugstores. These
interests are described more fully in the paragraph below.
CVS has entered into a single store lease with a limited liability
company of which Messrs. Eugene and Lawrence Goldstein each own 30%. During
2000 CVS lease payments to this limited liability company amounted to
approximately $179,550. CVS has also entered into a single-store lease with
a company of which Messrs. Eugene and Lawrence Goldstein together own a 20%
interest. During 2000 CVS lease payments to this company amounted to
approximately $415,000 (CVS took possession in March 2000 at an annual rent
of $501,000). In addition, in 1999 three companies in which Messrs. Eugene
and Lawrence Goldstein own minority interests each agreed to develop a CVS
store project for a fixed fee. The companies will not retain an ownership
interest in these store projects. One of these projects was abandoned and
the company affiliated with the Goldsteins was not paid any development
fee. The aggregate fees paid by CVS to the other two companies in 2000 were
$275,000 plus expenses. The companies affiliated with the Goldsteins have
now been paid in full for these projects. All of the transactions described
in this paragraph were approved in the ordinary course of business by the
CVS real estate committee and were reviewed by our Audit Committee.
Consequently, CVS believes that the terms of these transactions were
determined in an arms-length manner.
ITEM 2: APPROVAL OF INCREASE IN SHARES AUTHORIZED FOR ISSUANCE UNDER
OUR 1997 INCENTIVE COMPENSATION PLAN
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In May 1997, our stockholders approved our 1997 Incentive Compensation
Plan (the "Plan"), which is the only compensation plan under which the
Company presently grants stock options, restricted stock and other equity-
based awards to its employees. Our Board of Directors believes that
attracting and retaining key employees is essential to CVS' growth and
success. The Board also believes that the long-term success of CVS is
enhanced by its competitive and comprehensive compensation program, in
which the Plan plays a central role. Awards under the Plan have enabled and
will continue to enable CVS to attract and retain key employees and enable
those employees to acquire and/or increase their proprietary interest in
CVS, thereby aligning their interests with the interests of CVS'
stockholders.
20
In 1999, in an effort to attract and retain the most highly qualified
store personnel possible, CVS adopted a program whereby stock options were
awarded to our full-time store managers and pharmacists. Approximately
3,700 store managers and 9,000 pharmacists received awards in March 2000
under this new program. CVS anticipates making awards under this program
approximately every other year, and the next awards are anticipated to be
made prior to our annual meeting in 2002. CVS has also expanded the number
of officers and key employees who received awards under the Plan, from
approximately 170 in 1997 to over 700 in 2000, and we plan to continue
making awards to officers and key employees on an annual basis. It is now
anticipated that the present number of shares available for grant under the
Plan will not be enough to meet the Company's needs for awards that are
presently planned to be granted prior to our annual meeting in 2002. We are
therefore proposing an amendment to the Plan to allow for the issuance of
additional shares under the Plan. The full text of the proposed amendment
is set forth on Exhibit A to this Proxy Statement.
On February 5, 2001, the Management Planning and Development Committee
recommended approval of an amendment increasing the aggregate number of
shares of common stock authorized for issuance under the Plan. On February
21, 2001, the full Board of Directors approved the amendment, subject to
stockholder approval, increasing the aggregate number of shares of common
stock authorized for issuance under the Plan by 19.5 million shares,
resolved that the amendment be submitted to a vote of the stockholders, and
recommended that you vote FOR approval of the amendment. As of February 22,
2001, the closing sale price of CVS common stock on the New York Stock
Exchange was $58.37.
The following is a brief description of the material features of the
Plan.
Types of Awards. The terms of the Plan provide for grants of stock
options, stock appreciation rights ("SARs"), restricted stock, deferred
stock, other stock-related awards, and performance or annual incentive
awards that may be settled in cash, stock, or other property ("Awards").
Shares Subject to the Plan; Annual Per-Person Limitations. As approved
on May 29, 1997, under the Plan, the total number of shares of CVS common
stock reserved and available for delivery to participants in connection
with Awards was (i) 5.0 million, plus (ii) the number of shares of CVS
common stock remaining available under certain preexisting plans on the
date of initial approval, plus (iii) the number of shares of CVS common
stock subject to awards under those preexisting plans which become
available (generally due to cancellation or forfeiture) after the date of
initial approval, plus (iv) 9.4% of the number of shares of CVS common
stock issued or delivered by CVS after the effective date of the Plan
(excluding any issuance or delivery in connection with Awards, or any other
compensation or benefit plan of CVS); provided, however, that the total
number of shares of CVS stock with respect to which incentive stock options
("ISOs") may be granted shall not exceed 4 million and the total number of
shares of restricted stock awarded under the Plan shall not exceed 3.6
million shares. As of February 5, 2001, as a result of adjustments made
pursuant to (ii)--(iv) above, there were approximately 23.3 million shares
authorized for issuance under the Plan, of which approximately 11.4 million
shares are subject to awards under the Plan and approximately 11.9 million
shares are available for awards under the Plan. If the amendment to the
Plan is approved, the number of shares in (i) above shall be increased to
24.5 million from 5.0 million and the aggregate number of shares issuable
under the Plan will be increased to approximately 42.8 million from
approximately 23.3 million. The total number of shares issuable under the
Plan will remain subject to adjustment as set forth in the Plan, including
pursuant to (ii)--(iv) above. Any shares of CVS stock delivered under the
Plan may consist of authorized and unissued shares or treasury shares. CVS
stock subject to an Award that is canceled, expired, forfeited, settled in
cash, or otherwise terminated without a delivery of shares to the
participant, including CVS stock withheld or surrendered in payment of any
exercise or purchase price of an Award or taxes relating to an Award, will
again be available for Awards under the Plan.
21
In addition, the Plan imposes individual limitations on the amount of
certain Awards in order to comply with Section 162(m) of the Internal
Revenue Code (the "Code"). Under these limitations, during any fiscal year
the number of options, SARs, shares of restricted stock, shares of deferred
stock, shares of CVS stock issued as a bonus or in lieu of other
obligations, and other stock-based Awards granted to any one participant
shall not exceed 3 million shares for each type of such Award, subject to
adjustment in certain circumstances. The maximum cash amount that may be
earned as a final annual incentive award or other annual cash Award in
respect of any fiscal year by any one participant is $5 million, and the
maximum cash amount that may be earned as a final performance award or
other cash Award in respect of a performance period other than an annual
period by any one participant on an annualized basis is $5 million.
The Management Planning and Development Committee is authorized to
adjust the number and kind of shares subject to the aggregate share
limitations and annual limitations under the Plan and subject to
outstanding Awards (including adjustments to exercise prices and number of
shares of options and other affected terms of Awards) in the event that a
dividend or other distribution (whether in cash, shares, or other
property), recapitalization, forward or reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase, or share
exchange, or other similar corporate transaction or event affects the CVS
stock so that an adjustment is appropriate. The Committee is also
authorized to adjust performance conditions and other terms of Awards in
response to these kinds of events or in response to changes in applicable
laws, regulations, accounting principles, or other special events.
Eligibility. Executive officers and other officers and employees of CVS
or any subsidiary, including any such person who may also be a director of
CVS, shall be eligible to be granted Awards under the Plan. It is
anticipated that approximately 15,000 persons will be eligible to receive
Awards under the Plan.
Administration. The Plan is administered by the Management Planning and
Development Committee of the Board of the Directors, formerly known as the
Compensation and Human Resources Committee (the "Committee"), except to the
extent the Board elects to administer the Plan. Subject to the terms and
conditions of the Plan, the Committee is authorized to select participants,
determine the type and number of Awards to be granted and the number of
shares of CVS stock or dollar amounts to which Awards will relate, specify
times at which Awards will be exercisable (including performance conditions
that may be required as a condition thereof), set other terms and
conditions of such Awards, prescribe forms of Award agreements, interpret
and specify rules and regulations relating to the Plan, and make all other
determinations that may be necessary or advisable for the administration of
the Plan. The Plan provides that Committee members shall not be personally
liable, and shall be fully indemnified, in connection with any action,
determination, or interpretation taken or made in good faith under the
Plan.
Stock Options and SARs. The Committee is authorized to grant stock
options, including both ISOs that can result in potentially favorable tax
treatment to the participant and non-qualified stock options (i.e., options
not qualifying as ISOs), and SARs entitling the participant to receive the
excess of the fair market value of a share of CVS stock on the date of
exercise over the grant price of the SAR. The exercise price per share
subject to an option and the grant price of an SAR is determined by the
Committee, but must not be less than the fair market value of a share of
CVS stock on the date of grant (except to the extent of in-the-money awards
or cash obligations surrendered by the participant at the time of grant).
The maximum term of each option or SAR, the times at which each option or
SAR will be exercisable, and provisions requiring forfeiture of unexercised
options or SARs at or following termination of employment generally is
fixed by the Committee, except no option or SAR may have a term exceeding
ten years. Options may be exercised by payment of the exercise price in
cash, CVS stock, outstanding Awards, or other property (possibly including
notes or obligations to make payment on a deferred basis) having a fair
market value equal to the exercise price, as the Committee may determine
from time to time. Methods of exercise and settlement and other terms of
the SARs are determined by the Committee.
22
Repricing. The Committee shall not, without further approval of CVS
stockholders, grant any options or SARs under the Plan that would
constitute a "repricing" of such options or SARs and thereby trigger the
disclosure obligation under Item 402(i) of Regulation S-K or any successor
provision.
Restricted and Deferred Stock. The Committee is authorized to grant
restricted stock and deferred stock. Restricted stock is a grant of CVS
stock which may not be sold or disposed of, and which may be forfeited in
the event of certain terminations of employment and/or failure to meet
certain performance requirements prior to the end of a restricted period
specified by the Committee. Restricted and deferred stock typically vests
over a three year period, or if based on performance requirements typically
vests over a minimum period of one year. A participant granted restricted
stock generally has all of the rights of a stockholder of CVS, including
the right to vote the shares and to receive dividends thereon, unless
otherwise determined by the Committee. An Award of deferred stock confers
upon a participant the right to receive shares at the end of a specified
deferral period, subject to possible forfeiture of the Award in the event
of certain terminations of employment and/or failure to meet certain
performance requirements prior to the end of a specified restricted period
(which restricted period need not extend for the entire duration of the
deferral period). Prior to settlement, an Award of deferred stock carries
no voting or dividend rights or other rights associated with share
ownership, although dividend equivalents may be granted, as discussed
below.
Dividend Equivalents. The Committee is authorized to grant dividend
equivalents conferring on participants the right to receive, currently or
on an accrual basis, cash, shares, other Awards, or other property equal in
value to dividends paid on a specific number of shares or other periodic
payments. Dividend equivalents may be granted on a free-standing basis or
in connection with another Award, may be paid currently or on an accrued
basis, and, if accrued, may be deemed to have been reinvested in additional
shares, Awards, or other investment vehicles specified by the Committee.
Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant shares as a bonus free of restrictions, or to grant
shares or other Awards in lieu of obligations to pay cash under other plans
or compensatory arrangements, subject to such terms as the Committee may
specify. The number of shares of stock granted in lieu of cash compensation
shall be reasonable, as determined by the Committee.
Other Stock-Based Awards. The Plan authorizes the Committee to grant
Awards that are denominated or payable in, valued by reference to, or
otherwise based on or related to shares. Such Awards might include
convertible or exchangeable debt securities, other rights convertible or
exchangeable into shares, purchase rights for shares, Awards with value and
payment contingent upon performance of CVS or any other factors designated
by the Committee, and Awards valued by reference to the book value of
shares or the value of securities of or the performance of specified
subsidiaries. The Committee determines the terms and conditions of such
Awards, including consideration to be paid to exercise Awards in the nature
of purchase rights, the period during which Awards will be outstanding, and
forfeiture conditions and restrictions on Awards. Other stock-based awards
typically vest over a three year period, or if based on performance
requirements typically vest over a minimum period of one year.
Performance Awards, Including Annual Incentive Awards. The right of a
participant to exercise or receive a grant or settlement of an Award, and
the timing thereof, may be subject to such performance conditions as may be
specified by the Committee. In addition, the Plan authorizes specific
annual incentive awards, which represent a conditional right to receive
cash, shares or other Awards upon achievement of pre-established
performance goals during a specified one-year period. Performance awards
and annual incentive awards granted to persons the Committee expects will,
for the year in which a deduction arises, be among the Chief Executive
Officer and four other most highly compensated executive officers, will, if
so intended by the Committee, be subject to provisions that should qualify
such Awards as "performance-based compensation" not subject to the
limitation on tax deductibility by CVS under Code Section 162(m).
23
The performance goals to be achieved as a condition of payment or
settlement of a performance award or annual incentive award will consist of
(i) one or more business criteria and (ii) targeted level(s) of performance
with respect to each business criterion. In the case of performance awards
intended to meet the requirements of Code Section 162(m), the business
criteria used must be one of those specified in the Plan, although for
other participants the Committee may specify any other criteria. The
business criteria specified in the Plan are: (1) earnings per share; (2)
revenues; (3) cash flow; (4) cash flow return on investment; (5) return on
net assets, return on assets, return on investment, return on capital, or
return on equity; (6) economic value added; (7) operating margin; (8) net
income; pretax earnings; pretax earnings before interest, depreciation and
amortization; pretax operating earnings after interest expense and before
incentives, service fees, and extraordinary or special items; or operating
earnings; (9) total shareholder return; or (10) any of the above goals as
compared to the performance of a published or special index deemed
applicable by the Committee including, but not limited to, Standard &
Poor's 500 Stock Index or a group of comparable companies.
In granting annual incentive or performance awards, the Committee may
establish unfunded award "pools," the amounts of which will be based upon
the achievement of a performance goal or goals using one or more of the
business criteria described in the preceding paragraph. During the first 90
days of a fiscal year or other performance period (or such other period as
permitted under Code Section 162(m)), the Committee will determine who will
potentially receive annual incentive or performance awards for that fiscal
year or other performance period, either out of the pool or otherwise.
After the end of each fiscal year or other performance period, the
Committee will determine the amount, if any, of the pool, the maximum
amount of potential annual incentive or performance awards payable to each
participant in the pool, and the amount of any potential annual incentive
or performance award otherwise payable to a participant. The Committee may,
in its discretion, determine that the amount payable as a final annual
incentive or performance award will be increased or reduced from the amount
of any potential Award, but may not exercise discretion to increase any
such amount intended to qualify under Code Section 162(m).
Subject to the requirements of the Plan, the Committee will determine
other performance award and annual incentive award terms, including the
required levels of performance with respect to the business criteria, the
corresponding amounts payable upon achievement of such levels of
performance, termination and forfeiture provisions, and the form of
settlement.
Other Terms of Awards. Awards may be settled in the form of cash, CVS
stock, other Awards, or other property, in the discretion of the Committee.
The Committee may require or permit participants to defer the settlement of
all or part of an Award in accordance with such terms and conditions as the
Committee may establish, including payment or crediting of interest or
dividend equivalents on deferred amounts, and the crediting of earnings,
gains, and losses based on deemed investment of deferred amounts in
specified investment vehicles. The Committee is authorized to place cash,
shares, or other property in trusts or make other arrangements to provide
for payment of CVS' obligations under the Plan. The Committee may condition
any payment relating to an Award on the withholding of taxes and may
provide that a portion of any shares or other property to be distributed
will be withheld (or previously acquired shares or other property
surrendered by the participant) to satisfy withholding and other tax
obligations. Awards granted under the Plan generally may not be pledged or
otherwise encumbered and are not transferable except by will or by the laws
of descent and distribution, or to a designated beneficiary upon the
participant's death, except that the Committee may, in its discretion,
permit transfers for estate planning or other purposes.
Awards under the Plan are generally granted without a requirement that
the participant pay consideration in the form of cash or property for the
grant (as distinguished from the exercise), except to the extent required
by law. The Committee may, however, grant Awards in exchange for other
Awards under the Plan, awards under other plans of CVS, or other rights to
payment from CVS, and may grant Awards in addition to and in tandem with
such other Awards, awards, or rights as well.
24
Unless the Award agreement specifies otherwise, the Committee may cancel
or rescind Awards if the participant fails to comply with certain non-
competition, confidentiality, intellectual property or other covenants. For
instance, Awards may be canceled or rescinded if the participant engages in
competitive activity while employed with CVS or within a specified period
following termination of employment.
Acceleration of Vesting. The Committee may, in its discretion,
accelerate the exercisability, the lapsing of restrictions, or the
expiration of deferral or vesting periods of any Award, and such
accelerated exercisability, lapse, expiration and vesting shall occur
automatically in the case of a "change in control" of CVS except to the
extent otherwise determined by the Committee at the date of grant. In
addition, the Committee may provide that performance goals relating to any
performance-based award will be deemed to have been met upon the occurrence
of any change in control. Upon a change in control, except to the extent
otherwise determined by the Committee at the date of grant, options may at
the election of the participant be cashed out based on a defined "change in
control price," which will be the higher of (i) the cash and fair market
value of property that is the highest price per share of CVS stock paid
(including extraordinary dividends) in any change in control or liquidation
of shares of CVS stock following a sale of substantially all of the assets
of CVS, or (ii) the highest fair market value per share of CVS stock
(generally based on market price) at any time during the 60 days before and
60 days after a change in control. "Change in control" is defined in the
Plan to include a variety of events, including significant changes in the
stock ownership of CVS or a significant subsidiary, changes in CVS' board
of directors, certain mergers and consolidations of CVS or a significant
subsidiary, and the sale or disposition of all or substantially all the
consolidated assets of CVS.
Amendment and Termination of the Plan. The Board may amend, alter,
suspend, discontinue, or terminate the Plan or the Committee's authority to
grant Awards without further stockholder approval, except stockholder
approval must be obtained for any amendment or alteration if required by
law or regulation or under the rules of any stock exchange or automated
quotation system on which the shares are then listed or quoted, or if the
amendment increases the number of shares of stock reserved and authorized
for issuance in connection with Awards, materially modifies the
requirements as to eligibility for participation in the Plan, or materially
increases the benefits accruing to participants. Stockholder approval will
not be deemed to be required under laws or regulations, such as those
relating to ISOs, that condition favorable treatment of participants on
such approval, although the Board may, in its discretion, seek stockholder
approval in any circumstance in which it deems such approval advisable.
Thus, stockholder approval will not necessarily be required for amendments
that might increase the cost of the Plan. Unless earlier terminated by the
Board, the Plan will terminate at such time as no shares remain available
for issuance under the Plan and CVS has no further rights or obligations
with respect to outstanding Awards under the Plan.
Federal Income Tax Implications of the Plan. The following is a brief
description of the federal income tax consequences generally arising with
respect to Awards under the Plan.
The grant of an option or SAR will create no tax consequences for the
participant or CVS. A participant will not recognize taxable income upon
exercising an ISO (except that the alternative minimum tax may apply). Upon
exercising an option other than an ISO, the participant must generally
recognize ordinary income equal to the difference between the exercise
price and fair market value of the freely transferable and non-forfeitable
shares acquired on the date of exercise. Upon exercising an SAR, the
participant must generally recognize ordinary income equal to the cash or
the fair market value of the freely transferable and non-forfeitable shares
received.
Upon a disposition of shares acquired upon exercise of an ISO before the
end of the applicable ISO holding periods, the participant must generally
recognize ordinary income equal to the lesser of (i) the fair market value
of the shares at the date of exercise of the ISO minus the exercise price,
or (ii) the amount realized upon the disposition of the ISO shares minus
the exercise price. Otherwise, a participant's
25
disposition of shares acquired upon the exercise of an option (including an
ISO for which the ISO holding periods are met) or SAR generally will result
in short-term or long-term capital gain or loss measured by the difference
between the sale price and the participant's tax basis in such shares (the
tax basis generally being the exercise price plus any amount previously
recognized as ordinary income in connection with the exercise of the option
or SAR).
CVS generally will be entitled to a tax deduction equal to the amount
recognized as ordinary income by the participant in connection with an
option or SAR. CVS generally is not entitled to a tax deduction relating to
amounts that represent a capital gain to a participant. Accordingly, CVS
will not be entitled to any tax deduction with respect to an ISO if the
participant holds the shares for the ISO holding periods prior to
disposition of the shares.
With respect to Awards granted under the Plan that result in the payment
or issuance of cash or shares or other property that is either not
restricted as to transferability or not subject to a substantial risk of
forfeiture, the participant must generally recognize ordinary income equal
to the cash or the fair market value of shares or other property received.
Thus, deferral of the time of payment or issuance will generally result in
the deferral of the time the participant will be liable for income taxes
with respect to such payment or issuance. CVS generally will be entitled to
a deduction in an amount equal to the ordinary income recognized by the
participant.
With respect to Awards involving the issuance of shares or other
property that is restricted as to transferability and subject to a
substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the fair market value of the shares or other
property received at the first time the shares or other property becomes
transferable or is not subject to a substantial risk of forfeiture,
whichever occurs earlier. A participant may elect to be taxed at the time
of receipt of shares or other property rather than upon lapse of
restrictions on transferability or substantial risk of forfeiture, but if
the participant subsequently forfeits such shares or property, the
participant would not be entitled to any tax deduction, including as a
capital loss, for the value of the shares or property on which he
previously paid tax. The participant must file such election with the
Internal Revenue Service within 30 days of the receipt of the shares or
other property. CVS generally will be entitled to a deduction in an amount
equal to the ordinary income recognized by the participant.
Awards that are granted, accelerated or enhanced upon the occurrence of
a change in control may give rise, in whole or in part, to excess parachute
payments within the meaning of Code Section 280G and, to such extent, will
be non-deductible by CVS and subject to a 20% excise tax by the
participant. The foregoing summary of the federal income tax consequences
in respect of the Plan is for general information only. Interested parties
should consult their own advisors as to specific tax consequences,
including the application and effect of foreign, state and local tax laws.
***
The Board of Directors recommends a vote FOR approval of the Plan
amendment increasing the number of shares of common stock authorized for
issuance under the 1997 Incentive Compensation Plan by 19.5 million shares.
26
ITEM 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
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We have appointed KPMG LLP, independent public accountants, to audit the
financial statements of the Company for the fiscal year ending December 29,
2001. We are submitting this selection to you for your approval. KPMG
audited the Company's financial statements for the fiscal year ended
December 30, 2000. The following summarizes the fees paid to KPMG for
services rendered during fiscal 2000.
Audit Fees
The aggregate fees billed for professional services rendered by KPMG for
the audit of our financial statements for the 2000 fiscal year and the
reviews of the condensed financial statements included in our quarterly
reports on Form 10-Q for the 2000 fiscal year were $778,000.
Financial Information Systems Design and Implementation Fees
KPMG did not render any services to CVS for financial information
systems design and implementation during the 2000 fiscal year.
All Other Fees
The aggregate fees billed for all other services rendered by KPMG to CVS
during the 2000 fiscal year, exclusive of those services described above
were $1,568,000. These services consisted of tax services, acquisition and
other audits, audits of employee benefit plans and internal audit services.
The Audit Committee of the Board of Directors has considered whether
KPMG's provision of services other than services rendered in connection
with the audit of CVS's annual financial statements is compatible with
maintaining KPMG's independence.
Representatives of KPMG will be at the Annual Meeting to answer your
questions and will have the opportunity to make a statement if they so
desire.
If you do not ratify the appointment of KPMG LLP, the Board of Directors
will reconsider its appointment.
The Board of Directors recommends a vote FOR this proposal.
ITEM 4: OTHER MATTERS
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We do not know of any matters to be acted upon at the meeting other than
those discussed in this proxy statement. If any other matter is presented,
your proxy will vote on the matter in his or her best judgment.
27
Audit Committee Report
The Audit Committee of the Board of Directors (for purposes of this
report, the "Committee") is composed of four independent outside directors.
The Committee has prepared the following report on its activities with
respect to CVS's audited financial statements for the fiscal year ended
December 30, 2000 (the "audited financial statements").
. The Committee has reviewed and discussed the audited financial
statements with management;
. The Committee has discussed with KPMG LLP, the Company's independent
auditors, the matters required to be discussed by Statements on
Auditing Standards No. 61;
. The Committee has received the written disclosures and the letter
from KPMG required by Independence Standards Board Standard No. 1,
and has discussed with KPMG its independence from CVS; and
. Based on the review and discussions referred to above and relying
thereon, the Committee has recommended to the Board of Directors
that the audited financial statements be included in CVS's Annual
Report on Form 10-K for the fiscal year ended December 30, 2000, for
filing with the U.S. Securities and Exchange Commission.
William H. Joyce, Chair
W. Don Cornwell
Thomas P. Gerrity
Marian L. Heard
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires our executive officers and
directors and any persons who own more than 10 percent of our common stock
("reporting persons") to file reports of ownership and changes in ownership
on Forms 3, 4 and 5 with the SEC and the New York Stock Exchange ("NYSE").
These reporting persons are required by SEC regulation to furnish us with
copies of all Forms 3, 4 and 5 that they file with the SEC and NYSE. Based
on a review of the copies of such forms furnished to the Company and
written representations from our reporting persons, CVS believes that all
forms were filed in a timely manner during fiscal 2000.
Proxy Solicitation
We are soliciting this proxy on behalf of our Board of Directors and
will bear the solicitation expenses. We are making this solicitation by
mail but we may also solicit by telephone, telegraph or in person. We have
hired Morrow & Co. Inc. for a customary fee, plus out-of-pocket expenses,
to assist in the solicitation. We will reimburse banks, brokerage houses
and other institutions, nominees and fiduciaries, if they request, for
their expenses in forwarding proxy materials to beneficial owners.
28
Stockholder Proposals for our Annual Meeting in 2002
If you want to submit a proposal for possible inclusion in our proxy
statement for the 2002 annual meeting of stockholders, you must ensure your
proposal is received by us on or before November 14, 2001.
Thomas M. Ryan
Chairman of the Board, President and
Chief Executive Officer
March 14, 2001
29
EXHIBIT A
Section 4(a) of the 1997 Incentive Compensation Plan, as amended
4. Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject to
adjustment as provided in Section 10(c) hereof, the total number of shares
of Stock reserved and available for delivery in connection with Awards
under the Plan shall be (i) 24.5 million, plus (ii) the number of shares of
----
Stock remaining available under Preexisting Plans immediately prior to the
date on which shareholders of the Corporation originally approved the
---------- -
adoption of the Plan, plus (iii) the number of shares of Stock subject to
awards under Preexisting Plans which become available in accordance with
Section 4(c) hereof after the date on which shareholders of the Corporation
originally approved the adoption of the Plan, plus (iv) 9.4% of the number
---------- -
of shares of Stock issued or delivered by the Corporation during the term
of the Plan (excluding any issuance or delivery in connection with Awards,
or any other compensation or benefit plan of the Corporation); provided,
however, that the total number of shares of Stock with respect to which
ISOs may be granted shall not exceed 4 million, and the total number of
-
shares of restricted stock awarded under the Plan shall not exceed 3.6
---
million. Any shares of Stock delivered under the Plan shall consist of
authorized and unissued shares or treasury shares.
A-1
CVS CORPORATION
1997 Incentive Compensation Plan
As Amended Through
February 2001
Page
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1. Purpose 1
2. Definitions 1
3. Administration 3
(a) Authority of the Committee 3
(b) Manner of Exercise of Committee Authority 3
(c) Limitation of Liability 4
4. Stock Subject to Plan 4
(a) Overall Number of Shares Available for Delivery 4
(b) Application of Limitation to Grants of Awards 4
(c) Availability of Shares Not Delivered under Awards 5
5. Eligibility; Per-Person Award Limitations 5
6. Specific Terms of Awards 5
(a) General 5
(b) Options 5
(c) Stock Appreciation Rights 6
(d) Restricted Stock 6
(e) Deferred Stock 7
(f) Bonus Stock and Awards in Lieu of Obligations 8
(g) Dividend Equivalents 8
(h) Other Stock-Based Awards 8
7. Certain Provisions Applicable to Awards 8
(a) Stand-Alone, Additional, Tandem, and Substitute Awards 8
(b) Term of Awards 9
(c) Form and Timing of Payment under Awards; Deferrals 9
(d) Exemptions from Section 16(b) Liability 9
(e) Cancellation and Rescission of Awards 9
(f) Limitations on Vesting of Certain Awards 10
8. Performance and Annual Incentive Awards 10
(a) Performance Conditions 10
(b) Performance Awards Granted to Designated Covered Employees 10
(c) Annual Incentive Awards Granted to Designated Covered Employees 12
(d) Written Determinations 13
(e) Status of Section 8(b) and 8(c) Awards under Code Section 162(m) 13
(i)
Page
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9. Change in Control 13
(a) Effect of "Change in Control" 13
(b) Definition of "Change in Control" 14
(c) Definition of "Change in Control Price" 15
10. General Provisions 15
(a) Compliance with Legal and Other Requirements 15
(b) Limits on Transferability; Beneficiaries 15
(c) Adjustments 15
(d) Taxes 16
(e) Changes to the Plan and Awards 16
(f) Limitation on Rights Conferred under Plan 17
(g) Unfunded Status of Awards; Creation of Trusts 17
(h) Non-exclusivity of the Plan 17
(i) Payments in the Event of Forfeitures; Fractional Shares 17
(j) Governing Law 17
(k) Awards under Preexisting Plans 17
(l) Plan Effective Date and Shareholder Approval 17
(ii)
CVS CORPORATION
1997 INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED
1. PURPOSE. The purpose of this 1997 Incentive Compensation Plan (the
"Plan") is to assist CVS Corporation, a Delaware corporation (the
"Corporation"), and its subsidiaries in attracting, retaining, and rewarding
high-quality executives, employees, and other persons who provide services to
the Corporation and/or its subsidiaries, enabling such persons to acquire or
increase a proprietary interest in the Corporation in order to strengthen the
mutuality of interests between such persons and the Corporation's shareholders,
and providing such persons with annual and long-term performance incentives to
expend their maximum efforts in the creation of shareholder value. The Plan is
also intended to qualify certain compensation awarded under the Plan for tax
deductibility under Code Section 162(m) (as hereafter defined) to the extent
deemed appropriate by the Committee (or any successor committee) of the Board of
Directors of the Corporation.
2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Annual Incentive Award" means a conditional right granted to a
Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of
a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR), Restricted
Stock, Deferred Stock, Stock granted as a bonus or in lieu of another
award, Dividend Equivalent, Other Stock-Based Award, Performance Award or
Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards
or other rights are transferred if and to the extent permitted under
Section 10(b) hereof. If, upon a Participant's death, there is no
designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means person, persons, trust or trusts entitled by will or the
laws of descent and distribution to receive such benefits.
(d) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 under the Exchange Act and any successor to such Rule.
(e) "Board" means the Corporation's Board of Directors.
(f) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(i) "Committee" means a committee of two or more directors designated
by the Board to administer the Plan; provided, however, that, unless
otherwise determined by the Board, the Committee shall consist solely of
two or more directors, each of whom shall be (i) a "non-employee director"
within the meaning of Rule 16b-3 under the Exchange Act, unless
administration of the Plan by "non-employee directors" is not then required
in order for exemptions under Rule 16b-3 to apply to transactions under the
Plan, and (ii) an "outside director" as defined under Code Section 162(m),
unless administration of the Plan by "outside directors" is not then
required in order to qualify for tax deductibility under Code Section
162(m).
(j) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(k) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive Stock, cash or a combination thereof at the
end of a specified deferral period.
(l) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g), to receive cash, Stock, other Awards or other property
equal in value to dividends paid with respect to a specified number of
shares of Stock, or other periodic payments.
(m) "Effective Date" means January 8, 1997.
(n) "Eligible Person" means each Executive Officer and other officers
and employees of the Corporation or of any subsidiary, including such
persons who may also be directors of the Corporation. An employee on leave
of absence may be considered as still in the employ of the Corporation or a
subsidiary for purposes of eligibility for participation in the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(p) "Executive Officer" means an executive officer of the Corporation
as defined under the Exchange Act.
(q) "Fair Market Value" means the fair market value of Stock, Awards
or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee,
the Fair Market Value of Stock shall be the average of the highest and
lowest prices of a share of Stock, as quoted on the composite transactions
table on the New York Stock Exchange, on the last trading day prior to the
date on which the determination of fair market value is being made.
(r) "Incentive Stock Option" or "ISO" means any Option intended to be
and designated as an incentive stock option within the meaning of Code
Section 422 or any successor provision thereto.
(s) "Limited SAR" means a right granted to a Participant under Section
6(c) hereof.
(t) "Option" means a right, granted to a Participant under Section
6(b) hereof, to purchase Stock or other Awards at a specified price during
specified time periods.
(u) "Other Stock Based Awards" means Awards granted to a Participant
under Section 6(h) hereof.
(v) "Participant" means a person who has been granted an Award under
the Plan that remains outstanding, including a person who is no longer an
Eligible Person.
(w) "Performance Award" means a right, granted to a Participant under
Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee.
(x) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
and shall include a "group" as defined in Section 13(d) thereof.
(y) "Preexisting Plans" mean the CVS Corporation Omnibus Stock
Incentive Plan, the CVS Corporation 1987 Stock Option Plan, and the CVS
Corporation 1973 Stock Option Plan.
(z) "Qualified Member" means a member of the Committee who is a "Non-
Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside
director" within the meaning of Regulation 1.162-27 under Code Section
162(m).
(aa) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.
(bb) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(cc) "Stock" means the Corporation's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(dd) "Stock Appreciation Rights" or "SAR" means a right granted to a
Participant under Section 6(c) hereof.
3. ADMINISTRATION.
(a) Authority of the Committee. The Plan shall be administered by the
Committee, except to the extent the Board elects to administer the Plan, in
which case references herein to the "Committee" shall be deemed to include
references to the "Board". The Committee shall have full and final
authority, in each case subject to and consistent with the provisions of
the Plan, to select Eligible Persons to become Participants, grant Awards,
determine the type, number and other terms and conditions of, and all other
matters relating to, Awards, prescribe Award agreements (which need not be
identical for each Participant) and rules and regulations for the
administration of the Plan, construe and interpret the Plan and Award
agreements and correct defects, supply omissions or reconcile
inconsistencies therein, and to make all other decisions and determinations
as the Committee may deem necessary or advisable for the administration of
the Plan.
(b) Manner of Exercise of Committee Authority. At any time that a
member of the Committee is not a Qualified Member, any action of the
Committee relating to an Award granted or to be granted to a Participant
who is then subject to Section 16 of the Exchange Act in respect of the
Corporation, or relating to an Award intended by the Committee to qualify
as "performance-based compensation" within the meaning of Code Section
162(m) and regulations thereunder, may be taken either (i) by a
subcommittee, designated by the Committee, composed solely of two or more
Qualified Members, or (ii) by the Committee but with each such member who
is not a Qualified Member abstaining or recusing himself or herself from
such action; provided, however, that, upon such abstention or recusal, the
Committee remains composed solely of two or more Qualified Members. Such
action, authorized by such a subcommittee or by the Committee upon the
abstention or recusal of such non-Qualified Member(s), shall be the action
of the Committee for purposes of the Plan. Any action of the Committee
shall be final, conclusive and binding on all persons, including the
Corporation, its subsidiaries, Participants, Beneficiaries, transferees
under Section 10(b) hereof or other persons claiming rights from or through
a Participant, and shareholders. The express grant of any specific power to
the Committee, and the taking of any action by the Committee, shall not be
construed as limiting any power or authority of the Committee. The
Committee may delegate to officers or managers of the Corporation or any
subsidiary, or committees thereof, the authority, subject to such terms as
the Committee shall determine, to perform such functions, including
administrative functions, as the Committee may determine, to the extent
that such delegation will not result in the loss of an exemption under Rule
16b-3(d)(1) for Awards granted to Participants subject to Section 16 of the
Exchange Act in respect of the Corporation and will not cause Awards
intended to qualify as "performance-based compensation" under Code Section
162(m) to fail to so qualify. The Committee may appoint agents to assist it
in administering the Plan.
(c) Limitation of Liability. The Committee and each member thereof
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any executive officer, other officer
or employee of the Corporation or a subsidiary, the Corporation's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and any officer or
employee of the Corporation or a subsidiary acting at the direction or on
behalf of the Committee shall not be personally liable for any action or
determination taken or made in good faith with respect to the Plan, and
shall, to the extent permitted by law, be fully indemnified and protected
by the Corporation with respect to any such action or determination.
4. STOCK SUBJECT TO PLAN.
(a) Overall Number of Shares Available for Delivery. Subject to
adjustment as provided in Section 10(c) hereof, the total number of shares
of Stock reserved and available for delivery in connection with Awards
under the Plan shall be (i) 24.5 million, plus (ii) the number of shares of
Stock remaining available under Preexisting Plans immediately prior to the
date on which shareholders of the Corporation originally approved the
adoption of the Plan, plus (iii) the number of shares of Stock subject to
awards under Preexisting Plans which become available in accordance with
Section 4(c) hereof after the date on which shareholders of the Corporation
originally approved the adoption of the Plan, plus (iv) 9.4% of the number
of shares of Stock issued or delivered by the Corporation during the term
of the Plan (excluding any issuance or delivery in connection with Awards,
or any other compensation or benefit plan of the Corporation); provided,
however, that the total number of shares of Stock with respect to which
ISOs may be granted shall not exceed 4 million and the total number of
shares of restricted stock awarded under the Plan shall not exceed 3.6
million. Any shares of Stock delivered under the Plan shall consist of
authorized and unissued shares or treasury shares.
(b) Application of Limitation to Grants of Awards. No Award may be
granted if the number of shares of Stock to be delivered in connection with
such Award or, in the case of an Award relating to shares of Stock but
settleable only in cash (such as cash-only SARs), the number of shares to
which such Award relates, exceeds the number of shares of Stock remaining
available under the Plan minus the number of shares of Stock issuable in
settlement of or relating to then-outstanding Awards. The Committee may
adopt reasonable counting procedures to ensure appropriate counting, avoid
double counting (as, for example, in the case of tandem or substitute
awards) and make adjustments if the number of shares of Stock actually
delivered differs from the number of shares previously counted in
connection with an Award.
(c) Availability of Shares Not Delivered under Awards. Shares of Stock
subject to an Award under the Plan or award under a Preexisting Plan that
is canceled, expired, forfeited, settled in cash or otherwise terminated
without a delivery of shares to the Participant, including (i) the number
of shares withheld in payment of any exercise or purchase price of an Award
or award or taxes relating to Awards or awards, and (ii) the number of
shares surrendered in payment of any exercise or purchase price of an Award
or award or taxes relating to any Award or award, will again be available
for Awards under the Plan, except that if any such shares could not again
be available for Awards to a particular Participant under any applicable
law or regulation, such shares shall be available exclusively for Awards to
Participants who are not subject to such limitation.
5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. Awards may be granted under
the Plan only to Eligible Persons. In each fiscal year during any part of which
the Plan is in effect, an Eligible Person may not be granted Awards relating to
more than 1.5 million shares of Stock, subject to adjustment as provided in
Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), 6(h),
8(b) and 8(c). In addition, the maximum cash amount that may be earned under the
Plan as a final Annual Incentive Award or other cash annual Award in respect of
any fiscal year by any one Participant shall be $5 million, and the maximum cash
amount that may be earned under the Plan as a final Performance Award or other
cash Award in respect of a performance period other than an annual period by any
one Participant on an annualized basis shall be $5 million.
6. SPECIFIC TERMS OF AWARDS.
(a) General. Awards may be granted on the terms and conditions set forth
in this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 10(e)),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms requiring forfeiture
of Awards in the event of termination of employment by the Participant and terms
permitting a Participant to make elections relating to his or her Award. The
Committee shall retain full power and discretion to accelerate, waive or modify,
at any time, any term or condition of an Award that is not mandatory under the
Plan. Except in cases in which the Committee is authorized to require other
forms of consideration under the Plan, or to the extent other forms of
consideration must by paid to satisfy the requirements of the Delaware General
Corporation Law, no consideration other than services may be required for the
grant (but not the exercise) of any Award.
(b) Options. The Committee is authorized to grant Options to Participants
on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock purchasable
under an Option shall be determined by the Committee, provided that such
exercise price shall be not less than the Fair Market Value of a share of
Stock on the date of grant of such Option except as provided under Section
7(a) hereof.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the methods by which
such exercise price may be paid or deemed to be paid, the form of such
payment, including, without limitation, cash, Stock, other Awards or awards
granted under other plans of the Corporation or any subsidiary, or other
property (including notes or other contractual obligations of Participants
to make payment on a deferred basis), and the methods by or forms in which
Stock will be delivered or deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall comply
in all respects with the provisions of Code Section 422. Anything in the
Plan to the contrary notwithstanding, no term of the Plan relating to ISOs
(including any SAR in tandem therewith) shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify either the Plan or any ISO under Code
Section 422, unless the Participant has first requested the change that
will result in such disqualification.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs
to Participants on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise (or, in
the case of a "Limited SAR," the Fair Market Value determined by reference
to the Change in Control Price, as defined under Section 9(c) hereof) over
(B) the grant price of the SAR as determined by the Committee.
(ii) Other Terms. The Committee shall determine at the date of grant
or thereafter, the time or times at which and the circumstances under which
a SAR may be exercised in whole or in part (including based on achievement
of performance goals and/or future service requirements), the method of
exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed
to be delivered to Participants, whether or not a SAR shall be in tandem or
in combination with any other Award, and any other terms and conditions of
any SAR. Limited SARs that may only be exercised in connection with a
Change in Control or other event as specified by the Committee may be
granted on such terms, not inconsistent with this Section 6(c), as the
Committee may determine. SARs and Limited SARs may be either freestanding
or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such
restrictions on transferability, risk of forfeiture and other restrictions,
if any, as the Committee may impose, which restrictions may lapse
separately or in combination at such times, under such circumstances
(including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee may
determine at the date of grant or thereafter. Except to the extent
restricted under the terms of the Plan and any Award agreement relating to
the Restricted Stock, a Participant granted Restricted Stock shall have all
of the rights of a shareholder, including the right to vote the Restricted
Stock and the right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee). During the
restricted period applicable to the Restricted Stock, subject to Section
10(b) below, the Restricted Stock may not be sold, transferred, pledged,
hypothecated, margined or otherwise encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Corporation; provided that the Committee
may provide, by rule or regulation or in any Award agreement, or may
determine in any individual case, that restrictions or forfeiture
conditions relating to Restricted Stock shall be waived in whole or in part
in the event of terminations resulting from specified causes, and the
Committee may in other cases waive in whole or in part the forfeiture of
Restricted Stock.
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, the Committee may require that such certificates bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to such Restricted Stock, that the Corporation retain physical
possession of the certificates, and that the Participant deliver a stock
power to the Corporation, endorsed in blank, relating to the Restricted
Stock.
(iv) Dividends and Splits. As a condition to the grant of an Award of
Restricted Stock, the Committee may require that any cash dividends paid on
a share of Restricted Stock be automatically reinvested in additional
shares of Restricted Stock or applied to the purchase of additional Awards
under the Plan. Unless otherwise determined by the Committee, Stock
distributed in connection with a Stock split or Stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a
risk of forfeiture to the same extent as the Restricted Stock with respect
to which such Stock or other property has been distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock to
Participants, which are rights to receive Stock, cash, or a combination thereof
at the end of a specified deferral period, subject to the following terms and
conditions:
(i) Award and Restrictions. Satisfaction of an Award of Deferred
Stock shall occur upon expiration of the deferral period specified for such
Deferred Stock by the Committee (or, if permitted by the Committee, as
elected by the Participant). In addition, Deferred Stock shall be subject
to such restrictions (which may include a risk of forfeiture) as the
Committee may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times (including
based on achievement of performance goals and/or future service
requirements), separately or in combination, in installments or otherwise,
as the Committee may determine. Deferred Stock may be satisfied by delivery
of Stock, cash equal to the Fair Market Value of the specified number of
shares of Stock covered by the Deferred Stock, or a combination thereof, as
determined by the Committee at the date of grant or thereafter.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the
Award agreement evidencing the Deferred Stock), all Deferred Stock that is
at that time subject to deferral (other than a deferral at the election of
the Participant) shall be forfeited; provided that the Committee may
provide, by rule or regulation or in any Award agreement, or may determine
in any individual case, that restrictions or forfeiture conditions relating
to Deferred Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the Committee may in
other cases waive in whole or in part the forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by the
Committee at date of grant, Dividend Equivalents on the specified number of
shares of Stock covered by an Award of Deferred Stock shall be either (A)
paid with respect to such Deferred Stock at the dividend payment date in
cash or in shares of unrestricted Stock having a Fair Market Value equal to
the amount of such dividends, or (B) deferred with respect to such Deferred
Stock and the amount or value thereof automatically deemed reinvested in
additional Deferred Stock, other Awards or other investment vehicles, as
the Committee shall determine or permit the Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of obligations to pay cash or deliver other property under the Plan or under
other plans or compensatory arrangements, provided that, in the case of
Participants subject to Section 16 of the Exchange Act, the amount of such
grants remains within the discretion of the Committee to the extent necessary to
ensure that acquisitions of Stock or other Awards are exempt from liability
under Section 16(b) of the Exchange Act. Stock or Awards granted hereunder shall
be subject to such other terms as shall be determined by the Committee. In the
case of any grant of Stock to an officer of the Corporation in lieu of salary or
other cash compensation, the number of shares granted in place of such
compensation shall be reasonable, as determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to a Participant, entitling the Participant to receive cash, Stock,
other Awards, or other property equal in value to dividends paid with respect to
a specified number of shares of Stock, or other periodic payments. Dividend
Equivalents may be awarded on a free-standing basis or in connection with
another Award. The Committee may provide that Dividend Equivalents shall be paid
or distributed when accrued or shall be deemed to have been reinvested in
additional Stock, Awards, or other investment vehicles, and subject to such
restrictions on transferability and risks of forfeiture, as the Committee may
specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Stock, as deemed by the Committee to
be consistent with the purposes of the Plan, including, without limitation,
convertible or exchangeable debt securities, other rights convertible or
exchangeable into Stock, purchase rights for Stock, Awards with value and
payment contingent upon performance of the Corporation or any other factors
designated by the Committee, and Awards valued by reference to the book value of
Stock or the value of securities of or the performance of specified
subsidiaries. The Committee shall determine the terms and conditions of such
Awards. Stock delivered pursuant to an Award in the nature of a purchase right
granted under this Section 6(h) shall be purchased for such consideration, paid
for at such times, by such methods, and in such forms, including, without
limitation, cash, Stock, other Awards, or other property, as the Committee shall
determine. Cash awards, as an element of or supplement to any other Award under
the Plan, may also be granted pursuant to this Section 6(h).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution or exchange for, any other
Award or any award granted under another plan of the Corporation, any
subsidiary, or any business entity to be acquired by the Corporation or a
subsidiary, or any other right of a Participant to receive payment from the
Corporation or any subsidiary. Such additional, tandem, and substitute or
exchange Awards may be granted at any time. If an Award is granted in
substitution or exchange for another Award or award, the Committee shall require
the surrender of such other Award or award in consideration for the grant of the
new Award. In addition, Awards may be granted in lieu of cash compensation,
including in lieu of cash amounts payable under other plans of the Corporation
or any subsidiary, in which the value of Stock subject to the Award is
equivalent in value to the cash compensation (for example, Deferred Stock or
Restricted Stock), or in which the exercise price, grant price or purchase price
of the Award in the nature of a right that may be exercised is equal to the Fair
Market Value of the underlying Stock minus the value of the cash compensation
surrendered (for example, Options granted with an exercise price "discounted" by
the amount of the cash compensation surrendered).
(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided that in no event shall the term of any
Option or SAR exceed a period of ten years (or such shorter term as may be
required in respect of an ISO under Code Section 422).
(c) Form and Timing of Payment under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made by the
Corporation or a subsidiary upon the exercise of an Option or other Award or
settlement of an Award may be made in such forms as the Committee shall
determine, including, without limitation, cash, Stock, other Awards or other
property, and may be made in a single payment or transfer, in installments, or
on a deferred basis. The settlement of any Award may be accelerated, and cash
paid in lieu of Stock in connection with such settlement, in the discretion of
the Committee or upon occurrence of one or more specified events (in addition to
a Change in Control). Installment or deferred payments may be required by the
Committee (subject to Section 10(e) of the Plan, including the consent
provisions thereof in the case of any deferral of an outstanding Award not
provided for in the original Award agreement) or permitted at the election of
the Participant on terms and conditions established by the Committee. Payments
may include, without limitation, provisions for the payment or crediting of
reasonable interest on installment or deferred payments or the grant or
crediting of Dividend Equivalents or other amounts in respect of installment or
deferred payments denominated in Stock.
(d) Exemptions from Section 16(b) Liability. It is the intent of the
Corporation that the grant of any Awards to or other transaction by a
Participant who is subject to Section 16 of the Exchange Act shall be exempt
under Rule 16b-3 (except for transactions acknowledged in writing to be non-
exempt by such Participant). Accordingly, if any provision of this Plan or any
Award agreement does not comply with the requirements of Rule 16b-3 as then
applicable to any such transaction, such provision shall be construed or deemed
amended to the extent necessary to conform to the applicable requirements of
Rule 16b-3 so that such Participant shall avoid liability under Section 16(b).
(e) Cancellation and Rescission of Awards. Unless the Award agreement
specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred
Awards at any time, and the Corporation shall have the additional rights set
forth in Section 7(e)(iv) below, if the Participant is not in compliance with
all applicable provisions of the Award agreement and the Plan including the
following conditions:
(i) A Participant shall not render services for any organization or
engage directly or indirectly in any business that, in the judgment of the
Chief Executive Officer of the Corporation or other senior officer
designated by the Committee, is or becomes competitive with the
Corporation. For Participants whose employment has terminated, the judgment
of the Chief Executive Officer or other senior officer designated by the
Committee shall be based on the Participant's position and responsibilities
while employed by the Corporation, the Participant's post-employment
responsibilities and position with the other organization or business, the
extent of past, current and potential competition or conflict between the
Corporation and the other organization or business, the effect on the
Corporation's shareholders, customers, suppliers and competitors of the
Participant assuming the post-employment position and such other
considerations as are deemed relevant given the applicable facts and
circumstances. A Participant who has terminated employment shall be free,
however, to purchase as an investment or otherwise, stock or other
securities of such organization or business so long as they are listed upon
a recognized securities exchange or traded over-the-counter, and such
investment does not represent a greater than five percent equity interest
in the organization or business.
(ii) A Participant shall not, without prior written authorization from
the Corporation, disclose to anyone outside the Corporation, or use in
other than the Corporation's business, any confidential information or
material relating to the business of the Corporation that is acquired by
the Participant either during or after employment with the Corporation.
(iii) A Participant shall disclose promptly and assign to the
Corporation all right, title, and interest in any invention or idea,
patentable or not, made or conceived by the Participant during employment
by the Corporation, relating in any manner to the actual or anticipated
business, research or development work of the Corporation and shall do
anything reasonably necessary to enable the Corporation to secure a patent
where appropriate in the United States and in foreign countries.
(iv) Upon exercise, settlement, payment or delivery pursuant to an
Award, the Participant shall certify on a form acceptable to the Committee
that he or she is in compliance with the terms and conditions of the Plan.
Failure to comply with the provisions of this Section 7(e) prior to, or
during the six months after, any exercise, payment or delivery pursuant to
an Award shall cause such exercise, payment or delivery to be rescinded.
The Corporation shall notify the Participant in writing of any such
rescission within two years after such exercise, payment or delivery.
Within ten days after receiving such a notice from the Corporation, the
Participant shall pay to the Corporation the amount of any gain realized or
payment received as a result of the rescinded exercise, payment or delivery
pursuant to an Award. Such payment shall be made either in cash or by
returning to the Corporation the number of shares of Stock that the
Participant received in connection with the rescinded exercise, payment or
delivery.
(f) Limitation of Vesting of Certain Awards. Restricted Stock, Deferred
Stock, and Other Stock-Based Awards, as described in Section 6(d), 6(e) and 6(h)
of the Plan, respectively, generally will vest over a minimum period of three
years, except in the event of a Participant's death, disability, or retirement,
or in the event of a Change in Control or other special circumstances. The
foregoing notwithstanding, (i) Restricted Stock, Deferred Stock, and Other
Stock-Based Awards as to which either the grant or the vesting is based on the
achievement of one or more performance conditions generally will vest over a
minimum period of one year except in the vent of a Participant's death,
disability, or retirement, or in the event of a Change in Control or other
special circumstances, and (ii) up to 5% of the shares of Stock authorized under
the Plan may be granted as Restricted Stock, Deferred Stock, or Other Stock-
Based Awards without any minimum vesting requirements. For purposes of this
Section 7(f), vesting over a three-year period or one-year period will include
periodic vesting over such period if the rate of such vesting is proportional
throughout such period.
8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS.
(a) Performance Conditions. The right of a Participant to exercise or
receive a grant or settlement of any Award, and the timing thereof, may be
subject to such performance conditions as may be specified by the Committee. The
Committee may use such business criteria and other measures of performance as it
may deem appropriate in establishing any performance conditions, and may
exercise its discretion to reduce or increase the amounts payable under any
Award subject to performance conditions, except as limited under Sections 8(b)
and 8(c) hereof in the case of a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees. If the
Committee determines that a Performance Award to be granted to an Eligible
Person who is designated by the Committee as likely to be a Covered Employee
should qualify as "performance-based compensation" for purposes of Code Section
162(m), the grant, exercise and/or settlement of such Performance Award shall be
contingent upon achievement of pre-established performance goals and other terms
set forth in this Section 8(b).
(i) Performance Goals Generally. The performance goals for such
Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to each of such
criteria, as specified by the Committee consistent with this Section 8(b).
Performance goals shall be objective and shall otherwise meet the
requirements of Code Section 162(m) and regulations thereunder (including
Regulation 1.162-27 and successor regulations thereto), including the
requirement that the level or levels of performance targeted by the
Committee result in the achievement of performance goals being
"substantially uncertain." The Committee may determine that such
Performance Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise and/or
settlement of such Performance Awards. Performance goals may differ for
Performance Awards granted to any one Participant or to different
Participants.
(ii) Business Criteria. One or more of the following business
criteria for the Corporation, on a consolidated basis, and/or for specified
subsidiaries or business units of the Corporation (except with respect to
the total shareholder return and earnings per share criteria), shall be
used by the Committee in establishing performance goals for such
Performance Awards: (1) earnings per share; (2) revenues; (3) cash flow;
(4) cash flow return on investment; (5) return on net assets, return on
assets, return on investment, return on capital, return on equity; (6)
economic value added; (7) operating margin; (8) net income; pretax
earnings; pretax earnings before interest, depreciation and amortization;
pretax operating earnings after interest expense and before incentives,
service fees, and extraordinary or special items; operating earnings; (9)
total shareholder return; and (10) any of the above goals as compared to
the performance of a published or special index deemed applicable by the
Committee including, but not limited to, the Standard & Poor's 500 Stock
Index or a group of comparator companies. One or more of the foregoing
business criteria shall also be exclusively used in establishing
performance goals for Annual Incentive Awards granted to a Covered Employee
under Section 8(c) hereof.
(iii) Performance Period; Timing for Establishing Performance Goals.
Achievement of performance goals in respect of such Performance Awards
shall be measured over a performance period of up to ten years, as
specified by the Committee. Performance goals shall be established not
later than 90 days after the beginning of any performance period applicable
to such Performance Awards, or at such other date as may be required or
permitted for "performance-based compensation" under Code Section 162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes of
measuring performance of the Corporation in connection with Performance
Awards. The amount of such Performance Award pool shall be based upon the
achievement of a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance with
Section 8(b)(iii) hereof. The Committee may specify the amount of the
Performance Award pool as a percentage of any of such business criteria, a
percentage thereof in excess of a threshold amount, or as another amount
which need not bear a strictly mathematical relationship to such business
criteria.
(v) Settlement of Performance Awards; Other Terms. Settlement of such
Performance Awards shall be in cash, Stock, other Awards or other property,
in the discretion of the Committee. The Committee may, in its discretion,
reduce the amount of a settlement otherwise to be made in connection with
such Performance Awards, but may not exercise discretion to increase any
such amount payable to a Covered Employee in respect of a Performance Award
subject to this Section 8(b). The Committee shall specify the circumstances
in which such Performance Awards shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end of a
performance period or settlement of Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered Employees. If
the Committee determines that an Annual Incentive Award to be granted to an
Eligible Person who is designated by the Committee as likely to be a Covered
Employee should qualify as "performance-based compensation" for purposes of Code
Section 162(m), the grant, exercise and/or settlement of such Annual Incentive
Award shall be contingent upon achievement of pre-established performance goals
and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may establish an
Annual Incentive Award pool, which shall be an unfunded pool, for purposes
of measuring performance of the Corporation in connection with Annual
Incentive Awards. The amount of such Annual Incentive Award pool shall be
based upon the achievement of a performance goal or goals based on one or
more of the business criteria set forth in Section 8(b)(ii) hereof during
the given performance period, as specified by the Committee in accordance
with Section 8(b)(iii) hereof. The Committee may specify the amount of the
Annual Incentive Award pool as a percentage of any of such business
criteria, a percentage thereof in excess of a threshold amount, or as
another amount which need not bear a strictly mathematical relationship to
such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the end of the
90th day of each fiscal year, or at such other date as may be required or
permitted in the case of Awards intended to be "performance-based
compensation" under Code Section 162(m), the Committee shall determine the
Eligible Persons who will potentially receive Annual Incentive Awards, and
the amounts potentially payable thereunder, for that fiscal year, either
out of an Annual Incentive Award pool established by such date under
Section 8(c)(i) hereof or as individual Annual Incentive Awards. In the
case of individual Annual Incentive Awards intended to qualify under Code
Section 162(m), the amount potentially payable shall be based upon the
achievement of a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof in the given
performance year, as specified by the Committee; in other cases, such
amount shall be based on such criteria as shall be established by the
Committee. In all cases, the maximum Annual Incentive Award of any
Participant shall be subject to the limitation set forth in Section 5
hereof.
(iii) Payout of Annual Incentive Awards. After the end of each
fiscal year, the Committee shall determine the amount, if any, of (A) the
Annual Incentive Award pool, and the maximum amount of potential Annual
Incentive Award payable to each Participant in the Annual Incentive Award
pool, or (B) the amount of potential Annual Incentive Award otherwise
payable to each Participant. The Committee may, in its discretion,
determine that the amount payable to any Participant as a final Annual
Incentive Award shall be increased or reduced from the amount of his or her
potential Annual Incentive Award, including a determination to make no
final Award whatsoever, but may not exercise discretion to increase any
such amount in the case of an Annual Incentive Award intended to qualify
under Code Section 162(m). The Committee shall specify the circumstances in
which an Annual Incentive Award shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end of a fiscal
year or settlement of such Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee as to the
establishment of performance goals, the amount of any Performance Award pool or
potential individual Performance Awards and as to the achievement of performance
goals relating to Performance Awards under Section 8(b), and the amount of any
Annual Incentive Award pool or potential individual Annual Incentive Awards and
the amount of final Annual Incentive Awards under Section 8(c), shall be made in
writing in the case of any Award intended to qualify under Code Section 162(m).
The Committee may not delegate any responsibility relating to such Performance
Awards or Annual Incentive Awards.
(e) Status of Section 8(b) and Section 8(c) Awards under Code Section
162(m). It is the intent of the Corporation that Performance Awards and Annual
Incentive Awards under Sections 8(b) and 8(c) hereof granted to persons who are
designated by the Committee as likely to be Covered Employees within the meaning
of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27
and successor regulations thereto) shall, if so designated by the Committee,
constitute "performance-based compensation" within the meaning of Code Section
162(m) and regulations thereunder. Accordingly, the terms of Sections 8(b), (c),
(d) and (e), including the definitions of Covered Employee and other terms used
therein, shall be interpreted in a manner consistent with Code Section 162(m)
and regulations thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the
Committee, at the time of grant of Performance Awards or an Annual Incentive
Award, as likely to be a Covered Employee with respect to that fiscal year. If
any provision of the Plan as in effect on the date of adoption or any agreements
relating to Performance Awards or Annual Incentive Awards that are designated as
intended to comply with Code Section 162(m) does not comply or is inconsistent
with the requirements of Code Section 162(m) or regulations thereunder, such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements.
9. CHANGE IN CONTROL.
(a) Effect of "Change in Control." In the event of a "Change in Control,"
the following provisions shall apply unless otherwise provided in the Award
agreement:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as of the
time of the Change in Control and shall remain exercisable and vested for
the balance of the stated term of such Award without regard to any
termination of employment by the Participant, subject only to applicable
restrictions set forth in Section 10(a) hereof;
(ii) Any optionee who holds an Option shall be entitled to elect,
during the 60-day period immediately following a Change in Control, in lieu
of acquiring the shares of Stock covered by such Option, to receive, and
the Corporation shall be obligated to pay, in cash the excess of the Change
in Control Price over the exercise price of such Option, multiplied by the
number of shares of Stock covered by such Option;
(iii) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Plan shall lapse
and such Awards shall be deemed fully vested as of the time of the Change
in Control, except to the extent of any waiver by the Participant and
subject to applicable restrictions set forth in Section 10(a) hereof; and
(iv) With respect to any outstanding Award subject to achievement of
performance goals and conditions under the Plan, such performance goals and
other conditions will be deemed to be met if and to the extent so provided
by the Committee in the Award agreement relating to such Award.
(b) Definition of "Change in Control." A "Change in Control" shall be
deemed to have occurred if:
(i) any Person (other than the Company, any trustee or other fiduciary
holding securities under any employee benefit plan of the Company, or any
company owned, directly or indirectly, by the stockholders of the Company
immediately prior to the occurrence with respect to which the evaluation is
being made in substantially the same proportions as their ownership of the
common stock of the Company) becomes the Beneficial Owner (except that a
Person shall be deemed to be the Beneficial Owner of all shares that any
such Person has the right to acquire pursuant to any agreement or
arrangement or upon exercise of conversion rights, warrants or options or
otherwise, without regard to the sixty day period referred to in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company or any Significant Subsidiary (as defined below), representing 25%
or more of the combined voting power of the Company's or such subsidiary's
then outstanding securities;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i),
(iii), or (iv) of this paragraph) whose election by the Board or nomination
for election by the Company's stockholders was approved by a vote of at
least two-thirds of the directors then still in office who either were
directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved but excluding for this
purpose any such new director whose initial assumption of office occurs as
a result of either an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of an individual, corporation, partnership, group, associate
or other entity or Person other than the Board, cease for any reason to
constitute at least a majority of the Board;
(iii) the consummation of a merger or consolidation of the Company or
any subsidiary owning directly or indirectly all or substantially all of
the consolidated assets of the Company (a "Significant Subsidiary") with
any other entity, other than a merger or consolidation which would result
in the voting securities of the Company or a Significant Subsidiary
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving or resulting entity) more than 50% of the combined voting power
of the surviving or resulting entity outstanding immediately after such
merger or consolidation;
(iv) the stockholders of the Company approve a plan or agreement for
the sale or disposition of all or substantially all of the consolidated
assets of the Company (other than such a sale or disposition immediately
after which such assets will be owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company immediately prior to such sale
or disposition) in which case the Board shall determine the effective date
of the Change in Control resulting therefrom; or
(v) any other event occurs which the Board determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
(c) Definition of "Change in Control Price." The "Change in Control Price"
means an amount in cash equal to the higher of (i) the amount of cash and fair
market value of property that is the highest price per share paid (including
extraordinary dividends) in any transaction triggering the Change in Control or
any liquidation of shares following a sale of substantially all assets of the
Corporation, or (ii) the highest Fair Market Value per share at any time during
the 60-day period preceding and 60-day period following the Change in Control.
10. GENERAL PROVISIONS.
(a) Compliance with Legal and Other Requirements. The Corporation may, to
the extent deemed necessary or advisable by the Committee, postpone the issuance
or delivery of Stock or payment of other benefits under any Award until
completion of such registration or qualification of such Stock or other required
action under any federal or state law, rule or regulation, listing or other
required action with respect to any stock exchange or automated quotation system
upon which the Stock or other securities of the Corporation are listed or
quoted, or compliance with any other obligation of the Corporation, as the
Committee may consider appropriate, and may require any Participant to make such
representations, furnish such information and comply with or be subject to such
other conditions as it may consider appropriate in connection with the issuance
or delivery of Stock or payment of other benefits in compliance with applicable
laws, rules, and regulations, listing requirements, or other obligations. The
foregoing notwithstanding, in connection with a Change in Control, the
Corporation shall take or cause to be taken no action, and shall undertake or
permit to arise no legal or contractual obligation, that results or would result
in any postponement of the issuance or delivery of Stock or payment of benefits
under any Award or the imposition of any other conditions on such issuance,
delivery or payment, to the extent that such postponement or other condition
would represent a greater burden on a Participant than existed on the 90th day
preceding the Change in Control.
(b) Limits on Transferability; Beneficiaries. No Award or other right or
interest of a Participant under the Plan shall be pledged, hypothecated or
otherwise encumbered or subject to any lien, obligation or liability of such
Participant to any party (other than the Corporation or a subsidiary), or
assigned or transferred by such Participant otherwise than by will or the laws
of descent and distribution or to a Beneficiary upon the death of a Participant,
and such Awards or rights that may be exercisable shall be exercised during the
lifetime of the Participant only by the Participant or his or her guardian or
legal representative, except that Awards and other rights (other than ISOs and
SARs in tandem therewith) may be transferred to one or more Beneficiaries or
other transferees during the lifetime of the Participant, and may be exercised
by such transferees in accordance with the terms of such Award, but only if and
to the extent such transfers are permitted by the Committee pursuant to the
express terms of an Award agreement (subject to any terms and conditions which
the Committee may impose thereon). A Beneficiary, transferee, or other person
claiming any rights under the Plan from or through any Participant shall be
subject to all terms and conditions of the Plan and any Award agreement
applicable to such Participant, except as otherwise determined by the Committee,
and to any additional terms and conditions deemed necessary or appropriate by
the Committee.
(c) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Stock, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation, dissolution or other
similar corporate transaction or event affects the Stock such that an adjustment
is determined by the Committee to be appropriate under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Stock which may be delivered in connection
with Awards granted thereafter, (ii) the number and kind of shares of Stock by
which annual per-person Award limitations are measured under Section 5 hereof,
(iii) the number and kind of shares of Stock subject to or deliverable in
respect of outstanding Awards and (iv) the exercise price, grant price or
purchase price relating to any Award and/or make provision for payment of cash
or other property in respect of any outstanding Award. In addition, the
Committee is authorized to make adjustments in the terms and conditions of, and
the criteria included in, Awards (including Performance Awards and performance
goals, and Annual Incentive Awards and any Annual Incentive Award pool or
performance goals relating thereto) in recognition of unusual or nonrecurring
events (including, without limitation, events described in the preceding
sentence, as well as acquisitions and dispositions of businesses and assets)
affecting the Corporation, any subsidiary or any business unit, or the financial
statements of the Corporation or any subsidiary, or in response to changes in
applicable laws, regulations, accounting principles, tax rates and regulations
or business conditions or in view of the Committee's assessment of the business
strategy of the Corporation, any subsidiary or business unit thereof,
performance of comparable organizations, economic and business conditions,
personal performance of a Participant, and any other circumstances deemed
relevant; provided that no such adjustment shall be authorized or made if and to
the extent that such authority or the making of such adjustment would cause
Options, SARs, Performance Awards granted under Section 8(b) hereof or Annual
Incentive Awards granted under Section 8(c) hereof to Participants designated by
the Committee as Covered Employees and intended to qualify as "performance-based
compensation" under Code Section 162(m) and regulations thereunder to otherwise
fail to qualify as "performance-based compensation" under Code Section 162(m)
and regulations thereunder.
(d) Taxes. The Corporation and any subsidiary is authorized to withhold
from any Award granted, any payment relating to an Award under the Plan,
including from a distribution of Stock, or any payroll or other payment to a
Participant, amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Corporation and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations,
either on a mandatory or elective basis in the discretion of the Committee.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of shareholders or Participants, except that
any amendment or alteration to the Plan shall be subject to the approval of the
Corporation's shareholders not later than the annual meeting next following such
Board action if such shareholder approval is required by any federal or state
law or regulation or the rules of any stock exchange or automated quotation
system on which the Stock may then be listed or quoted, or if the amendment
increases the number of shares of Stock reserved and available for delivery in
connection with Awards, materially modifies the requirements as to eligibility
for participation in the Plan, or materially increases the benefits accruing to
Participants, and the Board may otherwise, in its discretion, determine to
submit other such changes to the Plan to shareholders for approval; provided
that, without the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee may waive any conditions
or rights under, or amend, alter, suspend, discontinue or terminate any Award
theretofore granted and any Award agreement relating thereto, except as
otherwise provided in the Plan; provided that, without the consent of an
affected Participant, no such Committee action may materially and adversely
affect the rights of such Participant under such Award. Notwithstanding anything
in the Plan to the contrary, if any right under this Plan would cause a
transaction to be ineligible for pooling of interest accounting that would, but
for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interest accounting
shall be available, including the substitution of Stock having a Fair Market
Value equal to the cash otherwise payable hereunder for the right which caused
the transaction to be ineligible for pooling of interest accounting.
(f) Limitation on Rights Conferred under Plan. Neither the Plan nor any
action taken hereunder shall be construed as (i) giving any Eligible Person or
Participant the right to continue as an Eligible Person or Participant or in the
employ or service of the Corporation or a subsidiary, (ii) interfering in any
way with the right of the Corporation or a subsidiary to terminate any Eligible
Person's or Participant's employment or service at any time, (iii) giving an
Eligible Person or Participant any claim to be granted any Award under the Plan
or to be treated uniformly with other Participants and employees, or (iv)
conferring on a Participant any of the rights of a shareholder of the
Corporation unless and until the Participant is duly issued or transferred
shares of Stock in accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant or obligation to deliver
Stock pursuant to an Award, nothing contained in the Plan or any Award shall
give any such Participant any rights that are greater than those of a general
creditor of the Corporation; provided that the Committee may authorize the
creation of trusts and deposit therein cash, Stock, other Awards or other
property, or make other arrangements to meet the Corporation's obligations under
the Plan. Such trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant. The trustee of such trusts may be
authorized to dispose of trust assets and reinvest the proceeds in alternative
investments, subject to such terms and conditions as the Committee may specify
and in accordance with applicable law.
(h) Non-exclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the shareholders of the Corporation for approval
shall be construed as creating any limitations on the power of the Board or a
committee thereof to adopt such other incentive arrangements as it may deem
desirable including incentive arrangements and awards which do not qualify under
Code Section 162(m).
(i) Payments in the Event of Forfeitures; Fractional Shares. Unless
otherwise determined by the Committee, in the event of a forfeiture of an Award
with respect to which a Participant paid cash or other consideration, the
Participant shall be repaid the amount of such cash or other consideration. No
fractional shares of Stock shall be issued or delivered pursuant to the Plan or
any Award. The Committee shall determine whether cash, other Awards or other
property shall be issued or paid in lieu of such fractional shares or whether
such fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
(j) Governing Law. The validity, construction and effect of the Plan, any
rules and regulations under the Plan, and any Award agreement shall be
determined in accordance with the Delaware General Corporation Law, without
giving effect to principles of conflicts of laws, and applicable federal law.
(k) Awards under Preexisting Plans. Upon approval of the Plan by
shareholders of the Corporation as required under Section 10(l) hereof, no
further awards shall be granted under the Preexisting Plans.
(l) Plan Effective Date and Shareholder Approval. The Plan has been
adopted by the Board effective January 8, 1997, subject to approval by the
shareholders of the Corporation. The Plan has been amended and restated
effective January 14, 1998 and further amended (subject to shareholder approval)
on February 21, 2001.
CVS CORPORATION
Annual Meeting of Stockholders of CVS Corporation
WEDNESDAY, APRIL 18, 2001 AT 10:00 A.M. EST
CVS Headquarters, One CVS Drive, Woonsocket, Rhode Island
THIS PROXY IS BEING SOLICITED BY THE CVS BOARD OF DIRECTORS
The undersigned hereby appoints each of Thomas M. Ryan and Ivan G.
Seidenberg as the undersigned's proxies, each with full power to act
without the other and with full power of substitution, to vote, as
indicated on all matters referred to on the reverse side of this card and
described in the proxy statement, all shares of common stock of CVS which
the undersigned would be entitled to vote if present at the Annual Meeting
and at any adjournments or postponements thereof.
Additional Voting Instructions for Certain CVS Employees: To the extent
the undersigned is a participant in the CVS Corporation and Subsidiaries
Employee Stock Ownership Plan (the "ESOP") and/or the CVS Corporation and
Subsidiaries 401(k) Profit Sharing Plan, (the "Profit Sharing Plan"), the
undersigned hereby instructs The Bank of New York: (i) as trustee under the
ESOP, to vote, as indicated on the reverse side, all shares of Series One
Convertible ESOP Preference Stock of CVS held in the ESOP, and (ii) as
administrator of the Profit Sharing Plan, to vote, as indicated on the
reverse side, all shares of CVS common stock held in the Profit Sharing
Plan, in each case as to which the undersigned would be entitled to give
voting instructions if present at the Meeting.
The undersigned hereby ratifies and confirms all that each of the proxies
and/or The Bank of New York may lawfully do in the premises, and hereby
revokes all proxies (or voting instructions in the case of Plan shares)
previously given by the undersigned to vote at the Meeting and at any
adjournments or postponements thereof. The undersigned acknowledges receipt
of the notice of and the proxy statement for the Meeting.
THE BOARD RECOMMENDS A VOTE "FOR" ITEMS 1, 2 AND 3 DESCRIBED ON THE REVERSE
SIDE OF THIS CARD.
TO VOTE IN ACCORDANCE WITH THE BOARD'S RECOMMENDATIONS, JUST SIGN ON THE
REVERSE SIDE; NO BOXES NEED TO BE MARKED. IF THIS PROXY (OR VOTING
INSTRUCTIONS, IN THE CASE OF PLAN SHARES) IS EXECUTED BUT NO INSTRUCTIONS
ARE GIVEN AS TO ANY ITEMS SET FORTH IN THIS PROXY, THIS PROXY WILL BE VOTED
FOR ITEMS 1, 2 AND 3 DESCRIBED ON THE REVERSE SIDE OF THIS CARD.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED ON THE REVERSE SIDE)
The Board of Directors recommends a vote FOR Items 1, 2 and 3. To vote in
accordance with the Board's recommendations, just sign below; no boxes need
to be checked.
Item 1. Election of 11 directors
FOR [ ] WITHHOLD [ ] *EXCEPTIONS [ ]
AUTHORITY
Nominees: Eugene Applebaum, W. Don Cornwell, Thomas P. Gerrity,
Stanley P. Goldstein, Marian L. Heard, William H. Joyce, Terry R.
Lautenbach,
Terrence Murray, Sheli Z. Rosenberg, Thomas M. Ryan, Ivan G. Seidenberg.
*(INSTRUCTIONS: TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE, MARK THE
"EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED
BELOW.)
____________________________________________
Item 2. Proposal to amend the Company's 1997 Incentive Compensation Plan,
increasing the number of shares of common stock authorized for issuance
under the Plan by 19.5 million shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Item 3. Proposal to ratify the appointment of KPMG LLP as CVS' independent
auditors for the fiscal year ending December 29, 2001.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Other Matters. In their discretion, Messrs. Ryan and Seidenberg, as
proxies, and/or The Bank of New York, as trustee or administrator, are
authorized to vote in accordance with their judgment upon such other
business as may properly come before the Meeting.
THIS PROXY (OR VOTING INSTRUCTIONS, IN THE CASE OF PLAN SHARES) WHEN
PROPERLY EXECUTED AND RETURNED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER(S). This Proxy is solicited on behalf of
the Board of Directors. Please mark, sign, date and return this proxy card
using the enclosed prepaid envelope. This Proxy must be returned for your
shares to be voted at the Meeting in accordance with your instructions if
you do not plan to attend the Meeting and vote in person. Please indicate
any change in address.
Please sign exactly as the name appears on this proxy card. Joint owners
should each sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give your full title.
Date _____________________________, 2001
Signature:______________________________
Votes must be indicated (x) in black or blue ink.