SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
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[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
CVS CORPORATION
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CVS - [LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 17, 2002
10:00 A.M.
CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
______________
To our stockholders:
We are pleased to invite you to attend our 2002 annual meeting of
stockholders to:
. Elect 11 directors;
. Ratify the appointment of KPMG LLP as independent auditors for 2002;
and
. Conduct other business properly brought before the meeting.
Stockholders of record at the close of business on February 20, 2002 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
----
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 .................................................... 15
Long Term Incentive Plan ......................................... 16
Stock Performance Graph .......................................... 17
Certain Executive Arrangements ................................... 18
Transactions with Directors and Officers ......................... 20
Item 2: Ratification of Appointment of Independent Auditors .............. 21
Item 3: Other Matters .................................................... 21
Audit Committee Report ........................................... 21
Section 16(a) Beneficial Ownership Reporting Compliance .......... 22
Proxy Solicitation ............................................... 22
Stockholder Proposals for Annual Meeting in 2003 ................. 22
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 2002 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 19, 2002 to all stockholders entitled to vote. The CVS 2001 Annual Report,
which includes our financial statements, is being sent with this proxy
statement.
Date, time and place of meeting
Date: April 17, 2002
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 20, 2002. As of the record date, there were
391,650,661 shares of common stock and 4,885,256 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); and
. "FOR" the ratification of the appointment of KPMG LLP as the
Company's independent auditors for fiscal 2002 (as described
on page 21).
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 20, 2002, 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 Ratification of appointment Approval is by affirmative vote
of independent auditors of a majority of the votes
represented by the shares of
common stock and the ESOP
Preference Stock present at the
meeting in person or by proxy,
voting as a single class.
Abstentions are counted and have
the effect of a vote against.
______________
* 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 and 2
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 2001, 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, except Mr. Applebaum, who
attended five of the eight Board meetings and neither of the two
Nominating and Corporate Governance Committee meetings.
The Board of Directors recommends the ELECTION of all nominees.
Biographies of our Board Nominees
Eugene Applebaum Director since 1998 Age 65
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 54
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., Avon Products, 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 60
Mr. Gerrity has been Professor of Management at The Wharton School of the
University of Pennsylvania since 1990. 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 Morgan Stanley Institutional Funds.
Stanley P. Goldstein Director since 1984 Age 67
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.
4
Marian L. Heard Director since 1999 Age 61
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.
William H. Joyce Director since 1994 Age 66
Mr. Joyce has been Chief Executive Officer and a member of the Board of
Directors of Hercules, Incorporated, a global manufacturer of chemical
specialties, since May 2001, and has been Chairman of the Board of Hercules
since June 2001. From February 2001 to April 2001, Mr. Joyce was Vice Chairman
of the Board of The Dow Chemical Company. From January 1996 to February 2001, he
was Chairman of the Board and Chief Executive Officer of Union Carbide
Corporation.
Terry R. Lautenbach Director since 1991 Age 63
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 Medical Systems, Inc. and
Footstar, Inc.
Terrence Murray Director since 1996 Age 62
Mr. Murray has been Chairman of FleetBoston Financial Corporation and its
predecessors ("FleetBoston") since May 1982 and served as Chief Executive
Officer of FleetBoston from May 1982 through December 2001. 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 60
Ms. Rosenberg has been Vice Chairman of Equity Group Investments, L.L.C., a
privately held 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 Capital Trust, Inc., Dynergy, Inc., Manufactured Home Communities,
Inc., Cendant Corporation and Ventos, Inc., and a trustee of Equity Residential
Properties Trust and Equity Office Properties Trust.
Thomas M. Ryan Director since 1996 Age 49
Mr. Ryan has been Chairman of CVS Corporation since April 1999, and Chief
Executive Officer and President of CVS Corporation since May 1998. From October
1996 to May 1998, Mr. Ryan was Vice Chairman of the Board and Chief Operating
Officer of CVS Corporation. From January 1994 to the present, Mr. Ryan has also
served as Chief Executive Officer and President of CVS Pharmacy, Inc. Mr. Ryan
is a director of FleetBoston Financial Corporation, Reebok International Ltd.
and TriCon Global Restaurants, Inc.
5
Ivan G. Seidenberg Director since 1993 Age 55
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.
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 six times during 2001. 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 the Proxy Statement for our 2000 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
Marian L. Heard
William H. Joyce
Terry R. Lautenbach
Terrence Murray (effective May 2001)
The Nominating and Corporate Governance Committee met two times
during 2001. Mr. Murray joined the Committee in May, after the 2001
meetings. 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.
6
Management Planning and Development Committee
Terry R. Lautenbach, Chair
Sheli Z. Rosenberg
Ivan G. Seidenberg
The Management Planning and Development Committee met four times
during 2001. Mr. Terrence Murray was a member of this Committee until his
resignation therefrom in May 2001. 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.
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.
In November 2001, each non-employee director elected to receive
15,000 CVS stock options in lieu of all fees described above for the
2002-2003 year. The ten-year options were granted on January 2, 2002 and
will vest in three equal annual installments beginning on January 2, 2003.
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 noted above, all non-employee directors elected to receive stock
options in lieu of all retainer and attendance fees for the 2002-2003
year.
As of December 29, 2001, our directors had deferred receipt of shares
of common stock as follows: Mr. Applebaum, 6,839 shares; Mr. Cornwell,
7,898 shares; Mr. Gerrity, 7,030 shares; Mr. Goldstein, 5,116 shares; Ms.
Heard, 4,422 shares; Mr. Joyce, 13,365 shares; Mr. Lautenbach, 12,951
shares; Mr. Murray, 8,838 shares; Ms. Rosenberg, 4,736 shares; and Mr.
Seidenberg, 13,027 shares.
Compensation Committee Interlocks and Insider Participation
Mr. Terrence Murray, Chairman of FleetBoston Financial Corporation,
serves on CVS' Board of Directors, but does not currently serve on CVS'
Management Planning and Development Committee. Mr. Thomas Ryan, Chairman,
President and Chief Executive Officer of CVS, serves on the Board of
Directors of FleetBoston and, as of June 2001, on FleetBoston's Human
Resources and Board Governance Committee (which oversees executive
compensation).
7
Share Ownership of Directors and Certain Executive Officers
The following table shows the share ownership, as of January 31,
2002, 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 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.
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Ownership of Common Stock/(1)/
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Name Number Percent
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Eugene Applebaum 1,361,418 /(1)(5)/ *
W. Don Cornwell 2,258 /(1)(5)/ *
Thomas P. Gerrity 38,250 /(1)(5)(6)/ *
Stanley P. Goldstein 1,541,863 /(1)(5)(7)/ *
Marian L. Heard 720 /(5)/ *
William H. Joyce 8,943 /(1)(5)/ *
Terry R. Lautenbach 34,747 /(1)(5)/ *
Larry J. Merlo 575,486 /(1)(2)(3)(4)/ *
Terrence Murray 11,728 /(5)(8)/ *
David B. Rickard 111,914 /(1)(2)(3)(4)/ *
Sheli Z. Rosenberg 18,285 /(5)/
*
Thomas M. Ryan 2,138,732 /(1)(2)(3)(4)/
*
Ivan G. Seidenberg 9,240 /(1)(5)/
*
Douglas A. Sgarro 135,032 /(1)(2)(3)(4)/
*
Larry J. Zigerelli 157,662 /(1)(2(3))(4)(9)/
*
All directors and executive officers 6,376,094 /(1)(2)(3)(4)(5)
as a group (18 persons) (6)(7)(8)(9)/ 1.62%
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*Less than 1%.
(1) Includes the following shares of common stock not currently owned,
but subject to options which were outstanding on January 31, 2002 and
were exercisable within 60 days thereafter: Mr. Applebaum, 50,000; Mr.
Gerrity, 4,620; Mr. Goldstein, 1,191,822; Mr. Joyce, 6,930; Mr.
Lautenbach, 6,930 Mr. Merlo, 423,227; Mr. Rickard, 20,000; Mr. Ryan,
1,650,410; Mr. Seidenberg, 9,240; Mr. Sgarro, 67,397; Mr. Zigerelli,
57,570; and all directors and executive officers as a group,
3,668,334.
(2) Includes the following 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, 306,972; Mr. Rickard 77,960; Mr.
Merlo, 102,493; Mr. Zigerelli, 89,568; Mr. Sgarro, 60,739; and all
executive officers as a group, 675,325.
(3) Includes the following 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, 120,116; Mr. Rickard, 3,008; Mr. Merlo, 34,595; Mr.
Zigerelli, 3,008; Mr. Sgarro, 5,712; and all directors and executive
officers as a group, 172,137.
(4) Does not include 4.89 million shares of ESOP preference stock held as
of January 31, 2002 by the ESOP, which was established in 1989. As of
December 31, 2001, the last date on which an allocation was made,
shares had been allocated as follows: Mr. Ryan, 1,186; Mr. Rickard,
84; Mr. Merlo, 826; Mr. Zigerelli, 105; Mr. Sgarro, 169; and all
executive officers as a group, 2,815.
8
(5) Does not include the following shares of common stock constituting
deferred non-employee director compensation: Mr. Applebaum, 6,839; Mr.
Cornwell, 7,898; Mr. Gerrity, 7,030; Mr. Goldstein, 5,116; Ms. Heard,
4,422; Mr. Joyce, 13,365; Mr. Lautenbach, 12,951; Mr. Murray, 8,838;
Ms. Rosenberg, 4,736; Mr. Seidenberg, 13,027; and all non-employee
directors as a group, 84,222.
(6) Includes 4,000 shares held by a family trust. Mr. Gerrity disclaims
beneficial ownership of these shares.
(7) 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.
(8) Includes 4,370 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.
(9) Mr. Zigerelli's employment with CVS ended on January 31, 2002.
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 20, 2002.
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.
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Name and Address of No. of shares Percent of
Title of Class Beneficial Owner beneficially owned class owned /(1)/
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Common stock Wellington Management Co., LLP/(2)/ 43,115,902 11.01%
75 State Street
Boston, MA 02109
Common stock FMR Corp./(3)/ 38,644,095 9.87%
82 Devonshire Street
Boston, MA 02109
Common stock Oppenheimer Capital LLC/(4)/ 28,521,888 7.28%
1345 Avenue of the Americas, 49th Fl.
New York, NY 10105
Series One ESOP CVS Corporation and Subsidiaries 4,885,256 100%
convertible Employee Stock Ownership Plan Trust
preference stock c/o Bank of New York, as Trustee
48 Wall Street
New York, NY 10005
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(1) This calculation is based on all outstanding shares of common stock
and ESOP preference stock as of February 20, 2002. Wellington
Management Co., FMR Corp., Oppenheimer Capital LLC and the ESOP own
shares representing approximately 10.70%, 9.59%, 7.08% and 2.79%,
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 filed February 12, 2002. Wellington
Management Co., LLP, in its capacity as an investment adviser, has
shared voting power with respect to 21,559,602 of these shares and
shared dispositive power over all of these shares.
(3) Information based on Schedule 13G filed February 13, 2002. FMR Corp.,
a parent holding company, and/or its subsidiaries, have sole voting
power with respect to 889,299 of these shares and sole dispositive
power over all of these shares.
(4) Information based on Schedule 13G filed February 12, 2002. Oppenheimer
Capital LLC, in its capacity as an investment adviser, has sole voting
and dispositive power with respect to all of these shares.
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 presently
composed of three directors, none of whom is an officer or employee of CVS
or its subsidiaries. Mr. Terrence Murray served as a fourth member of the
Committee until his resignation therefrom in May 2001. 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 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 2001, 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
11 retail companies, of which 2 are drug chains, with sales ranging from
approximately $9 billion to $45 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 2001 compensation program for
CVS' named executive officers resulted from the Committee's review of this
information.
For 2001, executive officer compensation consisted of base salaries,
potential cash bonuses based on annual performance, long-term performance
shares and stock options. In addition, in March 2000 the Committee
implemented 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
10
issued to certain executive officers. No awards were granted under this
Program to named executive officers during 2001. Total compensation levels
for 2001 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
2001, as part of the overall review of the CVS compensation program,
salaries of most 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 2001,
salaries for Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro were
$1,000,000, $595,000, $495,000, $495,000 and $395,000, respectively. Mr
Zigerelli's employment with CVS ended on January 31, 2002.
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 2001, Normal Awards payable in cash (subject to elective
deferral) were 140% of base salary for Mr. Ryan and up to 100% 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 2001, the Committee determined Mr. Ryan's annual incentive award
would be based on pre-established objectives for CVS' consolidated earnings
before federal income taxes ("EBIT"). Based on the Committee's conclusion
that the minimum objectives relating to EBIT goals were not met, Mr. Ryan
did not receive an annual incentive award for CVS' financial performance
for 2001. Annual incentive awards for 2001 payable to other named executive
officers were based on the same EBIT objective. Accordingly, no annual
incentives were paid to the other named executive officers for CVS'
financial performance for 2001.
The Committee made a discretionary cash award to Mr. Ryan in recognition
of his continued contributions to the profitability of CVS. In addition,
the Committee made discretionary cash awards to Messrs. Rickard, Merlo,
Zigerelli and Sgarro in recognition of their contributions to achieving
company-wide customer service goals. The Committee also allowed certain
executives to elect to receive stock options in lieu of the discretionary
cash awards and, pursuant to such elections, those option grants are
reflected in the Summary Compensation Table and Stock Option Grant Table
for each of the named executive officers.
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 equity-based
incentives into the executive compensation program in several ways. A key
element of this program is annual stock option grants. In 2001, the
Committee continued its general
11
policy of making annual stock option grants to executives and key
employees. Stock option grants in 2001 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 15. In 2001, the Committee also
granted options to over 900 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 store
managers and pharmacists approved in 1999, in 2001 the Committee approved
stock option awards for over 11,000 pharmacists and over 3,900 store
managers. Subsequent awards to store managers and pharmacists are expected
to occur every year.
Regular annual stock option awards granted in 2001 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 was from 1999 through 2001. Based on
the Committee's conclusion that the minimum objectives relating to EPS
goals were not met, no awards were paid for the first cycle.
The third full cycle began in 2001 and ends in 2003. Target awards for
this cycle for Mr. Ryan and the other named executive officers are
presented in the LTIP Table on page 16.
Partnership Equity Program
The Partnership Equity Program was implemented in 1997 for key
management 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.
Under the Program, certain key managers of CVS, including its
executive officers, have been given the opportunity 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.
12
For each share purchased (up to approved individual dollar limits), the
Committee made a matching grant of one deferred share; such deferred
shares vest 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 2001, 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, Long-Term Performance Share Plan or
Partnership Equity Program 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 $1 million to named executive officers
as performance-based compensation. To this end, in 1997 the Board adopted
and stockholders approved the 1997 Incentive Compensation Plan, which
permits annual incentive awards and stock options (and certain other
awards) to qualify as performance-based compensation not subject to the
limitation on deductibility. The Committee believes that stock options
granted under prior plans also qualify as performance-based compensation
under Section 162(m), and other steps such as deferral arrangements can be
used to avoid or minimize any loss of deductibility. Nevertheless,
maintaining tax deductibility is but one consideration among many - and is
not the most important consideration - in the design of the compensation
program for senior executives. The Committee may, from time to time,
conclude that compensation arrangements are in the best interest of CVS
and its stockholders despite the fact that such arrangements might not, in
whole or in part, qualify for tax deductibility.
Terry R. Lautenbach, Chair
Sheli Z. Rosenberg
Ivan G. Seidenberg
13
Summary Compensation Table
The following Summary Compensation Table shows information about the
compensation received by CVS' Chief Executive Officer and each of the four
other most highly compensated executive officers of CVS during the 2001
fiscal year for services rendered to the Company in all capacities during
the three fiscal years ended December 29, 2001.
-----------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
----------------------
Awards
------
Annual Compensation
-------------------
Restricted Securities All Other
Stock Underlying Compensa-
Name and Principal Position(s) Year Salary ($) Bonus ($) Awards($)/(1)/ Options(#)/(2)/ tion ($)/(3)/
-----------------------------------------------------------------------------------------------------------------------------------
Thomas M. Ryan 2001 993,750 -- -- 306,062 12,883
Chairman of the Board, President 2000 975,000 1,600,000 5,500,000 200,000 1,209,395
and Chief Executive Officer 1999 956,250 1,850,000 -- 150,000 1,510483
David B. Rickard/(4)/ 2001 595,000 -- -- 73,826 17,562 56
Executive Vice President, 2000 590,000 592,102 2,000,000 40,000 356,095
Chief Financial Officer and 1999 191,667 792,448 450,000 125,760 450,000
Chief Administration Officer
Larry J. Merlo 2001 495,000 -- -- 69,822 11,173
Executive Vice President - 2000 488,750 543,000 2,500,000 40,000 358,123
Stores 1999 465,000 725,000 -- 25,000 459,862
Larry J. Zigerelli/(5)/ 2001 490,000 -- -- 69,822 10,696
Executive Vice President - 2000 456,250 543,000 2,500,000 40,000 359,310
Marketing 1999 362,500 551,268 300,000 75,210 616
Douglas A. Sgarro 2001 390,000 -- -- 46,863 9,965
Senior Vice President and 2000 368,750 310,978 1,500,000 30,000 255,688
Chief Legal Officer 1999 350,000 375,169 124,950 20,000 7,005
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.
The following persons' aggregate holdings of restricted stock had a
fair market value as follows (based on a per share price of $30.115,
the average of the high and low sale prices of the common stock as
reported by the New York Stock Exchange on December 28, 2001 the last
trading day of our fiscal year): Mr. Ryan, 306,972 restricted shares
having a market value of $9,244,462; Mr. Rickard, 77,960 restricted
shares having a market value of $2,347,765; Mr. Merlo, 102,493
restricted shares having a market value of $3,086,577; Mr. Zigerelli,
89,568 restricted shares having a market value of $2,697,340; and Mr.
Sgarro, 60,739 restricted shares having a market value of $1,829,155.
14
(2) Options granted on January 2, 2002 in lieu of 2001 discretionary cash
awards to Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro become
exercisable in three equal annual installments beginning on the first
anniversary of the grant; regular annual options granted in March
2001 and 2000 to Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro
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 become exercisable in three annual
installments beginning on the second anniversary of the grant;
options granted in 1999 to Mr. Rickard become exercisable in three
annual installments beginning on the third anniversary of the grant
date.
(3) For 2001 this amount includes the following: $4,250 contributed under
CVS' 401(k) cash match to the 401(k) Profit Sharing Plan for each of
Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro; an estimated
61.375 ESOP shares based on a value of $69.246 per share (total value
$4,250) for the ESOP match to the 401(k) Profit Sharing Plan for each
of Messrs. Ryan, Rickard, Merlo, Zigerelli and Sgarro; and $4,383,
$9,062, $2,673, $2,196 and $1,465 of income in connection with life
insurance premiums for Messrs. Ryan, Rickard, Merlo, Zigerelli and
Sgarro, respectively.
(4) Mr. Rickard joined CVS in September 1999.
(5) Mr. Zigerelli joined CVS in February 1999 and left the Company on
January 31, 2002.
Stock Options
Option Grants for Fiscal Year Ending December 29, 2001
The following table shows the stock options awarded to the named executive
officers for fiscal 2001.
-------------------------------------------------------------------------------------------------------------------------
Individual Grants
============================================================================
Percentage of Present
No. of Securities Total Options Value on
Underlying Granted to Date of
Options Granted Employees in Exercise Price Expiration Date Grant/(4)/
Name (#) Fiscal Year/(3)/ ($) $
-------------------------------------------------------------------------------------------------------------------------
Thomas M. Ryan 250,000/(1)/ 4.549 60.525 3/07/2011 5,032,500
56,062/(2)/ 1.020 29.925 1/02/2012 608,833
David B. Rickard 50,000/(1)/ 0.910 60.525 3/07/2011 1,006,500
23,826/(2)/ 0.434 29.925 1/02/2012 258,750
Larry J. Merlo 50,000/(1)/ 0.910 60.525 3/07/2011 1,006,500
19,822/(2)/ 0.361 29.925 1/02/2012 215,267
Larry J. Zigerelli/(5)/ 50,000/(1)/ 0.910 60.525 3/07/2011 1,006,500
19,822/(2)/ 0.361 29.925 1/02/2012 215,267
Douglas A. Sgarro 35,000/(1)/ 0.637 60.525 3/07/2011 704,550
11,863/(2)/ 0.216 29.925 1/02/2012 128,832
-------------------------------------------------------------------------------------------------------------------------
(1) Annual stock 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) Options granted on January 2, 2002 in lieu of discretionary cash
awards for 2001 become exercisable in three equal annual installments
beginning on the first anniversary of the grant. For purposes of this
table, we have reflected these options as if they were granted during
fiscal 2001.
(3) Based on options to purchase 5,495,915 shares granted to all
employees during 2001 (including options granted on January 2, 2002
to named executive officers in lieu of discretionary cash awards for
2001).
(4) 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
March 7, 2011include the stock's expected volatility rate of 26.49%,
a projected dividend yield of 0.38% and a risk-free rate of return of
4.88%. Factors used to value options granted which expire on January
2, 2012 include the stock's expected volatility rate of 35.59%, a
projected dividend
15
yield of 0.78% and a risk-free rate of return of 5.14%. 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.
(5) Mr. Zigerelli's employment with CVS ended on January 31, 2002.
Aggregated Option Exercises in Fiscal Year Ending December 29, 2001 and Year-End
Option Values
The following table shows, for the named executive officers, the
stock options exercised during fiscal 2001 and the values of unexercised
options as of December 29, 2001.
----------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired Value Fiscal Year-End (#)/(1)/ at Fiscal Year-End ($)/(1)(2)/
Name On Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---------------------------------------------------------------------------------------------------------------------
Thomas M. Ryan 105,202 3,677,782 1,117,250/1,185,880 8,835,495/928,081
David B. Rickard 0 0 0/215,760 0/0
Larry J. Merlo 0 0 298,416/256,134 2,562,246/309,410
Larry J. Zigerelli 0 0 15,000/150,210 0/0
Douglas A. Sgarro 37,396 1,405,265 32,907/126,887 23,035/23,035
---------------------------------------------------------------------------------------------------------------------
(1) Does not include options granted January 2, 2002, which had no value at
fiscal year end because they had not yet been granted.
(2) The value of unexercised in-the-money options at fiscal year-end assumes a
fair market value of the common stock of $30.115, the average of the high
and low sale prices of the common stock as reported by the New York Stock
Exchange on December 28, 2001, 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.
Long Term Incentive Plan
The following table shows, for each named executive officer,
potential future payouts for the 2001-2003 performance period under the
Company's Long Term Performance Share Plan. Actual payouts are based on
the Company's EPS growth and stock price performance during the period,
and may range from no award to the maximum amount shown in the table.
---------------------------------------------------------------------------------------------------
Potential Future Payout/(1)/
Performance or
Name Other Period Threshold Target Maximum
---------------------------------------------------------------------------------------------------
Thomas M. Ryan 2001 - 2003 $1,650,000 $3,300,000 $4,950,000
David B. Rickard 2001 - 2003 300,000 600,000 900,000
Larry J. Merlo 2001 - 2003 300,000 600,000 900,000
Larry J. Zigerelli /(2)/ 2001 - 2003 300,000 600,000 900,000
Douglas A. Sgarro 2001 - 2003 250,000 500,000 750,000
---------------------------------------------------------------------------------------------------
(1) The potential future payout represents the total award value in
dollars; actual payment, if any, will be awarded half in stock and half
in cash. The number of shares to be awarded will be determined using
the Fair Market Value at the time of payment.
(2) Mr. Zigerelli's employment with CVS ended on January 31, 2002.
16
Stock Performance Graph
Comparison of Five Year Cumulative Total Stockholders' Return Among CVS, S&P 500
Index and S&P Retail Composite 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 31, 1996 through December 29, 2001
[GRAPH]
------------------------------------------------------------------------------------------------------------
Year End
--------------------------------------------------------------------
Compound Annual
1996 1997 1998 1999 2000 2001 Return Rate
------------------------------------------------------------------------------------------------------------
CVS Corporation $100 $156 $270 $196 $297 $148 8.1%
------------------------------------------------------------------------------------------------------------
S&P 500* 100 133 171 208 189 166 10.7%
------------------------------------------------------------------------------------------------------------
S&P Retail Stores Composite* 100 149 248 314 265 289 23.6%
------------------------------------------------------------------------------------------------------------
* 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 each of the named
executive officers. 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 were, as of year-end 2001, $1,000,000, $595,000,
$495,000, $495,000 and $395,000 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.
18
Mr. Zigerelli's employment with CVS ended on January 31, 2002. In
connection with his departure, Mr. Zigerelli and CVS agreed upon various
matters in relation to his then existing employment agreement and
incentive awards, including as to vesting of his option awards and amounts
due in respect of other stock-based awards and the Executive Retention
Program.
Supplemental Executive Retirement Plan
CVS maintains a Supplemental Executive Retirement Plan for Select
Senior Management of the Company (the "Supplemental Retirement Plan"). The
Supplemental 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 benefit formula (the "New Benefit Formula"). Under the New
Benefit Formula, executives selected for participation (including each of
the named executive officers 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 above, 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 $1,050,265 as of January 1, 2002, and the lump sum value
of such benefit was $12,076,472 based on assumptions specified in the
Supplemental Retirement Plan.
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, 2001
were 26, 2, 23, 3 and 4 years, respectively.
19
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 survivor forms of
payment of equivalent actuarial value may be elected.
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 November 2001, the Audit Committee and the full Board of Directors
approved an arrangement whereby one of CVS' preferred real estate
developers purchased real estate located in South Carolina from a company
with which Mr. Applebaum is affiliated for a purchase price of $1.3
million. After construction of a CVS store on the property, the preferred
developer intends to assign the purchase contract to CVS. Based on
appraisals received from two independent firms and the review and approval
of the Audit Committee and the Board, CVS believes that the terms of this
transaction were determined in an arms-length manner.
In addition, Messrs. Eugene and Lawrence Goldstein, the sons of
Stanley Goldstein, a director of the Company, each own minority interests
in entities that lease two drugstores to CVS. 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
2001 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 2001 CVS lease payments to this company amounted to
approximately $501,000. Both 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.
20
ITEM 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
We have appointed KPMG LLP, independent public accountants, to audit
the financial statements of the Company for the fiscal year ending December
28, 2002. We are submitting this selection to you for your approval. KPMG
audited the Company's financial statements for the fiscal year ended
December 29, 2001. The following summarizes the fees paid to KPMG for
services rendered during fiscal 2001.
Audit Fees
The aggregate fees billed for services rendered by KPMG for the audit
of our financial statements for the 2001 fiscal year and the reviews of the
condensed financial statements included in our quarterly reports on Form
10-Q for the 2001 fiscal year were approximately $809,000.
Financial Information Systems Design and Implementation Fees
KPMG did not render any services to CVS for financial information
systems design and implementation during the 2001 fiscal year.
All Other Fees
The aggregate fees billed for all other services rendered by KPMG to
CVS during the 2001 fiscal year exclusive of those services described above
were approximately $1,301,000. These services consisted of tax services,
acquisition and other audits, audits of employee benefit plans and our
charitable foundation and other 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' 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 3: OTHER MATTERS
--------------------------------------------------------------------------------
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.
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' audited financial statements for the fiscal year ended
December 29, 2001 (the "audited financial statements").
21
. 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' Annual Report on
Form 10-K for the fiscal year ended December 29, 2001, 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 2001.
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.
Stockholder Proposals for our Annual Meeting in 2003
If you want to submit a proposal for possible inclusion in our proxy
statement for the 2003 annual meeting of stockholders, you must ensure your
proposal is received by us on or before November 19, 2002.
Thomas M. Ryan
Chairman of the Board, President and
Chief Executive Officer
March 19, 2002
22
CVS CORPORATION
Annual Meeting of Stockholders of CVS Corporation
Wednesday, April 17, 2002 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 AND 2 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 AND 2 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 and 2. 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 ratify the appointment of KPMG LLP as CVS' independent
auditors for the fiscal year ending December 28, 2002.
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 _________________________________________, 2002
Signature:__________________________________________
Votes must be indicated (x) in black or blue ink.