-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IGMQ2UkfESIo+9zkRizl9EleqQ6dfsOGNMtG3lYuPTjV8QSj3mtrb0UxzuyTbsWg YjPJlBxfTDlNAE0k+grXVQ== 0001029869-98-001007.txt : 19980812 0001029869-98-001007.hdr.sgml : 19980812 ACCESSION NUMBER: 0001029869-98-001007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CVS CORP CENTRAL INDEX KEY: 0000064803 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 050494040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01011 FILM NUMBER: 98682060 BUSINESS ADDRESS: STREET 1: ONE CVS DR. CITY: WOONSOCKET STATE: RI ZIP: 02895- BUSINESS PHONE: 4017651500 MAIL ADDRESS: STREET 1: ONE CVS DR. CITY: WOONSOCKET STATE: RI ZIP: 02895- FORMER COMPANY: FORMER CONFORMED NAME: MELVILLE CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MELVILLE SHOE CORP DATE OF NAME CHANGE: 19760630 10-Q 1 CVS CORPORATION FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended Commission File Number June 27, 1998 001-01011 CVS CORPORATION --------------- (Exact name of registrant as specified in its charter) Delaware 05-0494040 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification Number) One CVS Drive, Woonsocket, Rhode Island 02895 --------------------------------------------- (Address of principal executive offices) Telephone: (401) 765-1500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Common Stock, $0.01 par value, outstanding at August 3, 1998: 389,337,279 shares ================================================================================ ================================================================================ INDEX
Page Part I Item 1. Financial Statements Consolidated Condensed Statements of Operations - Three and Six Months Ended June 27, 1998 and June 28, 1997 3 Consolidated Condensed Balance Sheets - As of June 27, 1998 and December 31, 1997 4 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 27, 1998 and June 28, 1997 5 Notes to Consolidated Condensed Financial Statements 6 Independent Accountants' Review Report 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Part II Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 22
2 Part I Item 1 ================================================================================ CVS Corporation Consolidated Condensed Statements of Operations (Unaudited)
Three Months Ended Six Months Ended In millions, except per common share amounts June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997 ============================================================================================================================= Net sales $3,755.9 $ 3,406.8 $ 7,357.4 $6,804.6 Cost of goods sold, buying and warehousing costs 2,735.4 2,533.8 5,330.0 4,963.7 - ----------------------------------------------------------------------------------------------------------------------------- Gross margin 1,020.5 873.0 2,027.4 1,840.9 Selling, general and administrative expenses 726.4 693.7 1,430.6 1,396.9 Depreciation and amortization 61.2 58.7 125.0 116.4 Merger and restructuring charges 158.3 411.7 158.3 442.7 - ----------------------------------------------------------------------------------------------------------------------------- Total operating expenses 945.9 1,164.1 1,713.9 1,956.0 - ----------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) 74.6 (291.1) 313.5 (115.1) Interest expense, net 18.9 16.2 30.1 29.1 - ----------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations before income taxes and extraordinary item 55.7 (307.3) 283.4 (144.2) Income tax provision (benefit) 39.5 (85.9) 135.2 (14.9) - ----------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations before extraordinary item 16.2 (221.4) 148.2 (129.3) Discontinued operations: Gain on disposal, net of income tax provision of $12.4 -- 17.4 -- 17.5 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from discontinued operations -- 17.4 -- 17.5 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) before extraordinary item 16.2 (204.0) 148.2 (111.8) Extraordinary item, loss related to early retirement of debt, net of income tax benefit of $11.4 -- (17.1) -- (17.1) - ----------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 16.2 (221.1) 148.2 (128.9) Preference dividends, net of income tax benefit (3.4) (3.4) (6.8) (6.8) - ----------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) available to common shareholders $ 12.8 $(224.5) $ 141.4 $ (135.7) ============================================================================================================================= Basic earnings per common share: Earnings (loss) from continuing operations before extraordinary item $ 0.03 $ (0.60) $ 0.37 $ (0.37) Earnings from discontinued operations -- 0.05 -- 0.05 Extraordinary item, net of income tax benefit -- (0.05) -- (0.05) - ----------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 0.03 $ (0.60) $ 0.37 $ (0.37) - ----------------------------------------------------------------------------------------------------------------------------- Weighted average basic common shares outstanding 385.8 373.9 384.3 372.3 ============================================================================================================================= Diluted earnings per common share: Earnings (loss) from continuing operations before extraordinary item $ 0.03 $ (0.60) $ 0.36 $ (0.37) Earnings from discontinued operations -- 0.05 -- 0.05 Extraordinary item, net of income tax benefit -- (0.05) -- (0.05) - ----------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 0.03 $ (0.60) $ 0.36 $ (0.37) - ----------------------------------------------------------------------------------------------------------------------------- Weighted average diluted common shares outstanding 394.6 373.9 404.1 372.3 ============================================================================================================================= Dividends declared per common share $ 0.0575 $0.0550 $0.1125 $ 0.1100 =============================================================================================================================
See accompanying notes to consolidated condensed financial statements. 3 Part I Item 1 ================================================================================ CVS Corporation Consolidated Condensed Balance Sheets (Unaudited)
June 27, December 31, In millions 1998 1997 ========================================================================================================================= Assets: Cash and cash equivalents $ 62.0 $ 192.5 Accounts receivable, net 499.3 452.4 Inventories 2,938.0 2,882.4 Other current assets 349.6 364.8 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 3,848.9 3,892.1 Property and equipment, net 1,171.9 1,072.3 Goodwill, net 712.3 711.5 Deferred charges and other assets 230.4 195.1 Reorganization value in excess of amounts allocated to identifiable assets, net 99.1 107.9 - ------------------------------------------------------------------------------------------------------------------------- Total assets $6,062.6 $5,978.9 ========================================================================================================================= Liabilities: Accounts payable $ 865.7 $1,233.7 Accrued expenses and other current liabilities 1,202.4 1,210.5 Short-term borrowings 673.9 466.4 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 2,742.0 2,910.6 Long-term debt 288.4 288.8 Other long-term liabilities 175.4 164.9 Shareholders' equity: Preference stock; par value $1.00, authorized 50 shares; Series One ESOP Convertible, issued and outstanding 5.3 shares at June 27, 1998 and December 31, 1997 281.7 284.6 Common stock; par value $0.01, authorized 1,000 shares, issued 399.6 and 393.8 shares at June 27, 1998 and December 31, 1997, respectively 4.0 2.0 Treasury stock at cost; 11.2 shares at June 27, 1998 and December 31, 1997 (260.4) (262.9) Guaranteed ESOP obligation (292.2) (292.2) Capital surplus 1,291.9 1,155.9 Retained earnings 1,831.8 1,727.2 - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,856.8 2,614.6 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $6,062.6 $5,978.9 =========================================================================================================================
See accompanying notes to consolidated condensed financial statements. 4 Part I Item 1 ================================================================================ CVS Corporation Consolidated Condensed Statements of Cash Flows (Unaudited)
Six Months Ended June 27, June 28, In millions 1998 1997 ================================================================================== Net cash used in operating activities $ (26.5) $ (17.4) ================================================================================== Cash flows from investing activities: Additions to property and equipment (224.7) (109.8) Proceeds from sale of investments -- 247.1 Proceeds from sale or disposal of assets 37.2 12.1 Acquisitions, net of cash (16.6) -- - ---------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (204.1) 149.4 ================================================================================== Cash flows from financing activities: Additions to short-term borrowings 207.5 -- Decrease in book overdrafts (133.5) (39.2) Dividends paid (43.6) (30.6) Reductions in long-term debt (20.1) (596.1) Proceeds from stock options exercised 89.8 136.1 - ---------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 100.1 (529.8) ================================================================================== Net decrease in cash and cash equivalents (130.5) (397.8) Cash and cash equivalents at beginning of period 192.5 506.8 - ---------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 62.0 $ 109.0 ==================================================================================
See accompanying notes to consolidated condensed financial statements. 5 Part I Item 1 ================================================================================ CVS Corporation Notes to Consolidated Condensed Financial Statements (Unaudited) Note 1 The accompanying consolidated condensed financial statements of CVS Corporation ("CVS" or the "Company") have been prepared without audit, in accordance with the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. In the opinion of management, the accompanying consolidated condensed financial statements include all adjustments (consisting only of normal recurring adjustments) which are necessary to present a fair statement of the Company's results of operations for the interim periods presented. Because of the influence of various factors on the Company's operations, including certain holidays and other seasonal influences, net earnings for any interim period may not be comparable to the same interim period in previous years, nor necessarily indicative of earnings for the full year. Note 2 On March 31, 1998, CVS completed a merger with Arbor Drugs, Inc. ("Arbor"), hereafter collectively referred to as the Company, pursuant to which on a post two-for-one common stock split basis, approximately 37.8 million shares of CVS common stock were issued for all of the outstanding common stock of Arbor (the "CVS/Arbor Merger"). Each outstanding share of Arbor common stock was exchanged for 0.6364 shares of CVS common stock in the CVS/Arbor Merger. In addition, outstanding Arbor employee and director stock options were converted at the same exchange ratio into options to purchase approximately 5.2 million shares of CVS common stock. The CVS/Arbor Merger, which constituted a tax-free reorganization, has been accounted for as a pooling of interests under Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." Accordingly, all prior period financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Arbor as if it had always been part of CVS. Prior to the CVS/Arbor Merger, Arbor's fiscal year ended on July 31. In recording the business combination, Arbor's fiscal year-end has been restated to reflect a December 31 year-end to conform with CVS' fiscal year-end. Arbor's cost of sales and inventories have been restated from the last-in, first-out method to the first-in, first-out method in order to conform to CVS' accounting method for inventories. There were no material transactions between CVS and Arbor prior to the CVS/Arbor Merger. Certain reclassifications have been made to Arbor's historical financial statements to conform to CVS' presentation. 6 Part I Item 1 ================================================================================ CVS Corporation Notes to Consolidated Condensed Financial Statements (Unaudited) In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," the Company recorded a charge to operating expenses of $158.3 million during the second quarter of 1998 for direct and other merger-related costs pertaining to the CVS/Arbor Merger transaction and certain restructuring activities (the "Arbor Restructuring Charge"). Following is a summary of the significant components of the Arbor Restructuring Charge:
================================================================================ Arbor Restructuring Balance In millions Charge Utilized at 6/27/98 - -------------------------------------------------------------------------------- Merger transaction costs $ 15.0 $ 11.4 $ 3.6 Restructuring costs: Employee severance 27.1 0.3 26.8 Exit costs 116.2 8.0 108.2 - -------------------------------------------------------------------------------- $158.3 $ 19.7 $138.6 ================================================================================
Merger transaction costs primarily include fees for investment bankers, attorneys, accountants, financial printing and other related charges. Restructuring activities primarily relate to the consolidation of administrative functions. These actions will result in the reduction of approximately 200 employees, primarily in Arbor's Troy, Michigan headquarters, and will include the consolidation and closure of certain facilities. Exit costs primarily relate to activities such as the cancellation of lease agreements, closing of facilities and the write-down of unutilized fixed assets. Asset write-offs included in the Arbor Restructuring Charge totaled $11.9 million. The balance of the charge, $146.4 million, will require cash outlays, primarily in 1998 and 1999. The Company also recorded a charge to cost of goods sold of $10.0 million during the second quarter of 1998 to reflect markdowns on non-compatible Arbor merchandise. Following is a summary of the results of operations for the separate companies prior to the CVS/Arbor Merger and the combined amounts presented in the accompanying consolidated condensed financial statements:
================================================================================ Three Months Ended In millions March 28, 1998 March 29, 1997 - -------------------------------------------------------------------------------- Net sales: CVS $ 3,333.6 $ 3,160.8 Arbor 267.9 237.0 - -------------------------------------------------------------------------------- $ 3,601.5 $ 3,397.8 ================================================================================ Earnings from continuing operations before extraordinary item: CVS $ 121.3 $ 82.7 Arbor 10.7 9.4 - -------------------------------------------------------------------------------- $ 132.0 $ 92.1 ================================================================================
7 Part I Item 1 ================================================================================ CVS Corporation Notes to Consolidated Condensed Financial Statements (Unaudited) Note 3 On May 29, 1997, CVS completed a merger with Revco D.S., Inc. ("Revco"), pursuant to which on a post two-for-one common stock split basis, approximately 120.6 million shares of CVS common stock were issued for all of the outstanding common stock of Revco (the "CVS/Revco Merger"). The CVS/Revco Merger, which constituted a tax-free reorganization, has been accounted for as a pooling of interests under APB Opinion No. 16. Accordingly, all prior period financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Revco as if it had always been part of CVS. In conjunction with the CVS/Revco Merger, the Company recorded a charge to operating expenses of $411.7 million in the second quarter of 1997 for direct and other merger-related costs pertaining to the CVS/Revco Merger transaction and certain restructuring activities (the "Revco Restructuring Charge"). Following is a summary of the significant components of the Revco Restructuring Charge:
============================================================================== Revco Restructuring Balance at In millions Charge Utilized June 27, 1998 ------------------------------------------------------------------------------ Merger transaction costs $ 35.0 $ 32.4 $ 2.6 Restructuring costs: Employee severance 89.8 54.7 35.1 Exit costs 286.9 174.3 112.6 ------------------------------------------------------------------------------ $411.7 $261.4 $150.3 ==============================================================================
The Company also recorded a $75.0 million charge to cost of goods sold during the second quarter of 1997 to reflect markdowns on non-compatible Revco merchandise of which $72.0 million had been utilized through June 27, 1998. Note 4 On May 13, 1998, the Company's shareholders approved an increase in the number of authorized common shares from 300 million to one billion. On that date, the Board of Directors authorized a two-for-one common stock split to be effected by the issuance of one additional share of common stock for each share of common stock outstanding. Such shares were distributed on June 15, 1998 to shareholders of record as of May 25, 1998. The accompanying consolidated condensed financial statements have been restated to reflect the effect of the two-for-one common stock split. Note 5 On June 26, 1998, the Company replaced its $300 million unsecured revolving credit facility, due to expire on June 30, 1998, with a $460 million, 364 day unsecured revolving credit facility. The Company's existing $670 million, five-year unsecured revolving credit facility, which expires on May 30, 2002, remained unchanged. 8 Part I Item 1 ================================================================================ CVS Corporation Notes to Consolidated Condensed Financial Statements (Unaudited) Note 6 Basic earnings per common share is computed by dividing: (i) net earnings, after deducting the after-tax dividends on the ESOP Preference Stock, by (ii) the weighted average number of common shares outstanding during the period (the "Basic Shares"). Diluted earnings per common share normally assumes that the ESOP Preference Stock is converted into common stock and all dilutive stock options are exercised. Diluted earnings per common share is computed by dividing: (i) net earnings, after accounting for the difference between the current dividends on the ESOP Preference Stock and the common stock and after making adjustments for certain non-discretionary expenses that are based on net earnings such as incentive bonuses and profit sharing by (ii) Basic Shares plus the additional shares that would be issued assuming that all dilutive stock options are exercised and the ESOP Preference Stock is converted into common stock. In the three months ended June 27, 1998, the assumed conversion of the ESOP Preference Stock would have increased diluted earnings per common share and, therefore, was not considered. In the three and six months ended June 28, 1997, due to the loss from continuing operations, the assumed conversion of the ESOP Preference Stock and the exercise of stock options would have also increased diluted earnings per share and, therefore, were not considered. Following is a reconciliation of basic and diluted earnings per common share from continuing operations:
==================================================================================================================== Three Months Ended Six Months Ended Per Per Common Common In millions, except per common share amounts Earnings Shares Share Earnings Shares Share - -------------------------------------------------------------------------------------------------------------------- June 27, 1998: Basic EPS: Earnings from continuing operations before extraordinary item $ 16.2 -- -- $ 148.2 -- -- Preference dividends, net of tax benefit (3.4) -- -- (6.8) -- -- - -------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $ 12.8 385.8 $ 0.03 $ 141.4 384.3 $ 0.37 - -------------------------------------------------------------------------------------------------------------------- Diluted EPS: Preference dividends, net of tax benefit -- -- -- 6.8 10.6 -- Dilutive earnings adjustments -- -- -- (0.5) -- -- Dilutive stock options -- 8.8 -- -- 9.2 -- - -------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $ 12.8 394.6 $ 0.03 $ 147.7 404.1 $ 0.36 ==================================================================================================================== June 28, 1997: Basic EPS: Earnings from continuing operations before extraordinary item $(221.4) -- -- $(129.3) -- -- Preference dividends, net of tax benefit (3.4) -- -- (6.8) -- -- - -------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders $(224.8) 373.9 $ (0.60) $(136.1) 372.3 $(0.37) - --------------------------------------------------------------------------------------------------------------------- Diluted EPS: Earnings from continuing operations available to common shareholders $(224.8) 373.9 $ (0.60) $(136.1) 372.3 $(0.37) =====================================================================================================================
9 Part I Item 1 ================================================================================ CVS Corporation Notes to Consolidated Condensed Financial Statements (Unaudited) Note 7 Following are the components of net interest expense:
============================================================================================================= Three Months Ended Six Months Ended In millions June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997 ------------------------------------------------------------------------------------------------------------- Interest expense $ 21.1 $ 21.3 $ 34.2 $ 40.6 Interest income (2.2) (5.1) (4.1) (11.5) ------------------------------------------------------------------------------------------------------------- Interest expense, net $ 18.9 $ 16.2 $ 30.1 $ 29.1 =============================================================================================================
Note 8 In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires companies to report financial information based on how management internally organizes information to make operating decisions and assess performance. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." SFAS No. 132 revises the disclosure requirements for pensions and other postretirement benefit plans. This statement, however, does not change any of the measurement or recognition provisions required under previous guidance. Both statements are effective for fiscal years beginning after December 15, 1997. The Company is in the process of determining what impact, if any, these pronouncements will have on its financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," effective for fiscal years beginning after December 15, 1998. SOP 98-1 defines which costs incurred to develop or purchase internal-use software should be capitalized and which should be expensed. The Company is in the process of determining what impact, if any, this pronouncement will have on its financial statements. 10 Part I Independent Accountants' Review Report ================================================================================ The Board of Directors and Shareholders of CVS Corporation: We have reviewed the consolidated condensed balance sheets of CVS Corporation as of June 27, 1998 and June 28, 1997, and the related consolidated condensed statements of operations for the three and six months then ended and cash flows for the six months then ended. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - ------------------------- KPMG PEAT MARWICK LLP Providence, Rhode Island July 29, 1998 11 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion explains material changes in the results of operations of CVS Corporation ("CVS") for the three and six months ended June 27, 1998 and June 28, 1997 and the significant developments affecting its financial condition since December 31, 1997. This discussion should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. All financial information presented herein has been restated to reflect the merger of CVS and Arbor Drugs, Inc. ("Arbor") and the two-for-one common stock split that was distributed to shareholders on June 15, 1998. CVS/Arbor Merger On March 31, 1998, CVS completed a merger with Arbor Drugs, Inc. ("Arbor"), hereafter collectively referred to as the Company, pursuant to which on a post two-for-one common stock split basis, approximately 37.8 million shares of CVS common stock were issued for all of the outstanding common stock of Arbor (the "CVS/Arbor Merger"). Each outstanding share of Arbor common stock was exchanged for 0.6364 shares of CVS common stock in the CVS/Arbor Merger. In addition, outstanding Arbor employee and director stock options were converted at the same exchange ratio into options to purchase approximately 5.2 million shares of CVS common stock. The CVS/Arbor Merger, which constituted a tax-free reorganization, has been accounted for as a pooling of interests under Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." Accordingly, all prior period financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Arbor as if it had always been part of CVS. The CVS/Arbor Merger established the Company as the nation's top chain drug retailer based on store count with over 4,000 stores in 24 states and the District of Columbia. The combined company is expected to have net sales of approximately $15 billion in 1998, and is expected to dispense approximately 12% of the retail prescriptions in the United States. The Company expects that the CVS/Arbor Merger will be accretive to earnings (before one-time merger-related charges) in the first full year of operations. The Company also expects to achieve cost savings from the combined operations of approximately $30 million annually, primarily through the closing of Arbor's headquarters, the achievement of economies of scale in advertising, distribution and other operational areas, and the spreading of its investments in information technology over a broader store base. See "Cautionary Statement Concerning Forward Looking Statements." See also Note 2 to the consolidated condensed financial statements for further information about the CVS/Arbor Merger and the Arbor Restructuring Charge (defined below). 12 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations CVS/Revco Merger On May 29, 1997, CVS completed a merger with Revco D.S., Inc. ("Revco"), pursuant to which on a post two-for-one common stock split basis, approximately 120.6 million shares of CVS common stock were issued for all of the outstanding common stock of Revco (the "CVS/Revco Merger"). The CVS/Revco Merger, which constituted a tax-free reorganization, has been accounted for as a pooling of interests under APB Opinion No. 16. Accordingly, all prior period financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Revco as if it had always been part of CVS. See Note 3 to the consolidated condensed financial statements for further information about the CVS/Revco Merger and the Revco Restructuring Charge (defined below). Other Matters On May 13, 1998, the Company's shareholders approved an increase in the number of authorized common shares from 300 million to one billion. On that date, the Board of Directors authorized a two-for-one common stock split to be effected by the issuance of one additional share of common stock for each share of common stock outstanding. Such shares were distributed on June 15, 1998 to shareholders of record as of May 25, 1998. In addition, the Board of Directors authorized an increase in the post two-for-one common stock split quarterly common stock cash dividend from $0.055 per share to $0.0575 per share. Results of Operations Second Quarter (1998 versus 1997) Net sales for the second quarter of 1998 increased $349.1 million or 10.2% to $3.8 billion, compared to $3.4 billion in the second quarter of 1997. Same store sales, consisting of sales from stores that have been open for more than one year, rose 11.7%, with pharmacy same store sales increasing 15.4%. Pharmacy sales were 57% of total sales in the second quarter of 1998, compared to 55% in the second quarter of 1997. Third party prescription sales were 83% of pharmacy sales during the second quarter of 1998, compared to 80% in the second quarter of 1997. Such increases in net sales and same store sales for the second quarter of 1998 were positively impacted by the shift in the Easter selling season from the first quarter of 1997 to the second quarter of 1998. In addition, net sales were negatively impacted by a reduction in total store count from 4,120 at June 28, 1997 to 4,056 at June 27, 1998 which resulted primarily from the divestiture of 120 Revco stores pursuant to a consent decree with the Federal Trade Commission entered into in connection with the CVS/Revco Merger. Net sales continue to benefit from the Company's efforts to elevate the performance level of the Revco stores by converting all retained Revco stores into the CVS store format. This conversion process consists of three elements: converting the Revco point-of-sale and pharmacy computer systems to CVS systems, revising the Revco planograms to reflect the CVS merchandise mix and remodeling the Revco stores to the "look and feel" of a CVS store. As of July 30, 1998, the Company had completed the conversion of Revco's systems as well as the revision of all Revco planograms (except for cosmetics which will be completed as the remaining Revco stores are remodeled). In addition, as of such date, the Company had remodeled approximately 1,470 Revco stores and expected to complete the remodeling process for the remaining 425 stores by October 1998. Further, the Company is in the process of relocating many of the Revco stores (as well as many CVS stores) from in-line strip center locations to free-standing sites. As a result of these efforts, the Company has begun to make progress in elevating the performance level of the Revco store base, especially with regard to front end sales. However, the increased sales performance has been aided by temporary promotional sales efforts and the rate of progress has varied (and is expected to continue to vary) on a market-by-market basis. 13 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Gross margin for the second quarter of 1998 increased $147.5 million or 16.9% to $1.0 billion, compared to $873.0 million in the second quarter of 1997. Gross margin as a percentage of net sales for the second quarter of 1998 was 27.2%, compared to 25.6% of net sales in the second quarter of 1997. It is important to note that during the second quarter of 1998, the Company recorded a $10.0 million charge to cost of goods sold to reflect markdowns on non-compatible Arbor merchandise (the "Arbor Inventory Markdown"). The Company also recorded a $75.0 million charge to cost of goods sold during the second quarter of 1997 to reflect markdowns on non-compatible Revco merchandise, (the "Revco Inventory Markdown"). Excluding the effect of the Arbor Inventory Markdown in 1998 and the Revco Inventory Markdown in 1997, comparable gross margin increased $82.5 million or 8.7% to $1.0 billion, or 27.4% of net sales, compared to $948.0 million or 27.8% of net sales during the prior year period. The decline in comparable gross margin as a percentage of net sales in 1998 was primarily due to the continued increase in lower gross margin third party prescription sales, the continued increase in pharmacy sales as a percentage of total sales and the increase in promotional activity primarily resulting from the name change events being held in certain Revco markets (collectively, the "Gross Margin Factors"). In recent years, the Company has experienced a reduction in pharmacy gross margin due to the efforts of managed care organizations and other third party payors to reduce prescription drug costs. To address this trend, in certain circumstances, the Company has declined to participate in certain third party programs that failed to satisfy minimum profitability standards. In the event this trend continues and the Company decides to decline participation in additional third party programs and/or terminate programs that fall below minimum profitability standards, the Company may be unable to sustain its current rate of sales growth. Total operating expenses for the second quarter of 1998 were $945.9 million or 25.2% of net sales, compared to $1.2 billion or 34.2% of net sales in the second quarter of 1997. It is important to note that: (i) during the second quarter of 1998, the Company recorded a $158.3 million charge to operating expenses for direct and other merger-related costs pertaining to the CVS/Arbor Merger transaction and certain restructuring activities (the "Arbor Restructuring Charge") and (ii) during the second quarter of 1997 recorded a $411.7 million charge to operating expenses for direct and other merger-related costs pertaining to the CVS/Revco Merger transaction and certain restructuring activities (the "Revco Restructuring Charge"). Excluding the effect of the Arbor Restructuring Charge in 1998 and the Revco Restructuring Charge in 1997, comparable operating expenses were $787.6 million or 21.0% of net sales in the second quarter of 1998, compared to $752.4 million or 22.1% of net sales in the second quarter of 1997. The improvement in comparable operating expenses as a percentage of net sales was primarily due to: (i) sales in the Company's existing store base growing at a faster rate than operating costs, (ii) the elimination of Revco's administrative expenses, (iii) the consolidation of CVS' and Arbor's administrative functions and (iv) continued efficiencies derived from technology investments (collectively, the "Operating Expense Improvement Factors"). Operating profit (loss) for the second quarter of 1998 increased $365.7 million or 125.6% to $74.6 million, compared to a loss of $291.1 million for the second quarter of 1997. Excluding the effect of the Arbor Inventory Markdown and the Arbor Restructuring Charge (collectively, the "Arbor Charges") in 1998 and the Revco Inventory Markdown and the Revco Restructuring Charge (collectively, the "Revco Charges") in 1997, comparable operating profit for the second quarter of 1998 increased $47.3 million or 24.2% to $242.9 million, compared to $195.6 million in the second quarter of 1997. Comparable operating profit as a percentage of net sales was 6.5% in the second quarter of 1998, compared to 5.7% in the second quarter of 1997. 14 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Interest expense, net for the second quarter of 1998 was $18.9 million, compared to $16.2 million in the second quarter of 1997. Interest expense for the second quarter of 1998 decreased $0.2 million to $21.1 million, compared to $21.3 million in the second quarter of 1997, primarily due to lower weighted average borrowing rates during 1998. Interest income for the second quarter of 1998 decreased $2.9 million to $2.2 million, compared to $5.1 million in the second quarter of 1997. Interest income in the second quarter of 1997 included interest realized on notes receivable that were received as a portion of the proceeds from the sale of certain operating businesses. These notes were sold during 1997. Earnings (loss) from continuing operations before extraordinary item for the second quarter of 1998 increased $237.6 million to $16.2 million, compared to a loss of $221.4 million in the second quarter of 1997. Excluding the effect of the Arbor Charges in 1998 and the Revco Charges in 1997, comparable earnings from continuing operations before extraordinary item increased $27.7 million or 27.1% to $129.9 million, or $0.32 per diluted share, compared to $102.2 million, or $0.26 per diluted share in the second quarter of 1997. Net earnings (loss), including the Arbor Charges, the Revco Charges, discontinued operations and the extraordinary item related to the early retirement of certain Revco debt during the second quarter of 1997 (the "Extraordinary Item"), increased to $16.2 million, or $0.03 per diluted share, during the second quarter of 1998, compared to a net loss of $221.1 million, or $0.60 per diluted share, in the second quarter of 1997. Six Months (1998 versus 1997) Net sales for the first six months of 1998 increased $552.8 million or 8.1% to $7.4 billion, compared to $6.8 billion in the first six months of 1997. Same store sales rose 9.6%, with pharmacy same store sales increasing 15.0%. Pharmacy sales were 57% of total sales for the first six months of 1998, compared to 55% for the first six months of 1997. Third party prescription sales were 83% of pharmacy sales for the first six months of 1998, compared to 80% in the first six months of 1997. See "Second Quarter (1998 versus 1997)" above for further information about factors affecting net sales. Gross margin for the first six months of 1998 increased $186.5 million or 10.1% to $2.0 billion, compared to $1.8 billion in the first six months of 1997. Excluding the effect of the Arbor Inventory Markdown in 1998 and the Revco Inventory Markdown in 1997, comparable gross margin increased to $2.0 billion or 27.7% of net sales for the first six months of 1998, compared to $1.9 billion or 28.2% of net sales in the first six months of 1997. The decline in gross margin as a percentage of net sales in 1998 was primarily due to the Gross Margin Factors. Total operating expenses for the first six months of 1998 were $1.7 billion or 23.3% of net sales, compared to $2.0 billion or 28.7% of net sales in the first six months of 1997. Excluding the Arbor Restructuring Charge in 1998, the Revco Restructuring Charge in 1997 and the $31.0 million charge recorded during the first quarter of 1997 for certain non-capitalizable costs associated with the restructuring of Big B, Inc. (the "Big B Charge"), comparable operating expenses for the first six months of 1998 were $1.6 billion or 21.1% of net sales, compared to $1.5 billion or 22.2% of net sales in the first six months of 1997. The improvement in comparable operating expenses as a percentage of net sales was primarily due to the Operating Expense Improvement Factors. Operating profit (loss) for the first six months of 1998 increased $428.6 million or 372.4% to $313.5 million, compared to a loss of $115.1 million in the first six months of 1997. Excluding the effect of the Arbor Charges in 1998 and the Revco Charges and the Big B Charge in 1997, comparable operating profit increased $79.2 million or 19.7% to $481.8 million in the first six months of 1998, compared to $402.6 million in the first six months of 1997. Comparable operating profit as a percentage of net sales was 6.6% in the first six months of 1998, compared to 5.9% in the first six months of 1997. 15 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Interest expense, net for the first six months of 1998 was $30.1 million, compared to $29.1 million in the first six months of 1997. Interest expense for the first six months of 1998 decreased $6.4 million to $34.2 million, compared to $40.6 million in the first six months of 1997, primarily due to reduced borrowing levels and lower weighted average borrowing rates. Interest income for the first six months of 1998 decreased $7.4 million to $4.1 million, compared to $11.5 million in the first six months of 1997. Interest income in the first six months of 1997 included interest realized on notes receivable that were received as a portion of the proceeds from the sale of certain operating businesses. These notes were sold during 1997. Earnings (loss) from continuing operations before extraordinary item for the first six months of 1998 increased to $148.2 million, compared to a loss of $129.3 million in the first six months of 1997. Excluding the effect of the Arbor Charges in 1998 and the Revco Charges and the Big B Charge in 1997, comparable earnings from continuing operations before extraordinary item increased $48.5 million or 22.7% to $261.9 million or $0.65 per diluted share for the first six months of 1998, compared to $213.4 million or $0.54 per diluted share for the first six months of 1997. Net earnings (loss) including the Arbor Charges, the Revco Charges, the Big B Charge, discontinued operations and the Extraordinary Item for the first six months of 1998 were $148.2 million or $0.36 per diluted share, compared to a net loss of $128.9 million or $0.37 per diluted share for the first six months of 1997. Liquidity and Capital Resources The Company has three primary sources of liquidity: (i) cash provided by operations, (ii) commercial paper and (iii) uncommitted lines of credit. The Company issues commercial paper to finance, in part, its seasonal inventory requirements and capital expenditures. The commercial paper program is supported by a $670 million, five year unsecured revolving credit facility which expires on May 30, 2002 and a $460 million, 364 day unsecured revolving credit facility which expires on June 26, 1999 (collectively the "Credit Facilities"). On June 26, 1998 the Company replaced its former $300 million credit facility, due to expire on June 30, 1998, with the $460 million credit facility. The Credit Facilities contain customary financial and operating covenants. Management believes that the restrictions contained in these covenants do not materially affect the Company's financial or operating flexibility. The Company can also obtain up to $35 million of short-term financing through various uncommitted lines of credit. As of June 27, 1998, the Company had $650.0 million of commercial paper outstanding at a weighted average interest rate of 5.8% and $23.9 million outstanding under various uncommitted lines of credit at a weighted average interest rate of 5.7%. Management believes that the Company's cash on hand and cash provided by operations, together with its ability to obtain additional short-term and long-term financing, will be sufficient to cover its working capital needs, capital expenditures, debt service requirements and future cash outlays associated with the integration of Revco and Arbor. 16 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations For the six months ended June 27, 1998, cash and cash equivalents decreased $130.5 million to $62.0 million. The decrease in 1998 was primarily attributable to the following: Net cash used in operating activities increased to $26.5 million for the first six months of 1998, compared to $17.4 million during the first six months of 1997. The increase was primarily due to an increase in inventory, a decrease in accounts payable and to cash outlays associated with the integration of Arbor and Revco. The increase in inventory was primarily the result of: (i) improving the in-stock position of everyday merchandise in the converted Revco stores prior to initiating promotional name change events and (ii) increasing inventory levels in the Company's distribution centers to: (a) ensure that stores are properly serviced during distribution center realignments and (b) enable the Company to reduce the level of lower gross margin product being purchased from pharmacy wholesalers rather than directly from manufacturers. The Company believes, however, that its current inventory level should be reduced and intends to do so by the end of 1998 without incurring significant markdowns. The Company intends to finance the temporary increase in inventory with short-term borrowings and, as a result, expects to incur additional interest expense. The Company believes, however, that the additional interest expense will be offset by improved operating performance. Net cash used in investing activities increased to $204.1 million during the first six months of 1998, compared to net cash provided by investing activities of $149.4 million during the first six months of 1997. The increase was primarily due to higher capital expenditures in 1998 and a decrease in the proceeds received from the sale of investments. During the second quarter of 1997, the Company sold its remaining investment in Linens `n Things, Inc. and a note receivable that was received as a portion of the proceeds from the sale of a former operating business for total proceeds of $247.1 million. During the second quarter of 1998, the Company opened 82 stores, including 42 relocations, and closed 48 stores. Year-to-date, the Company opened 148 stores, including 79 relocations, and closed 107 stores. The Company currently plans to open approximately 170 additional stores, about half of which will be relocations, during the remainder of 1998 and approximately 375 stores, about half of which will be relocations, during 1999. The Company is presently evaluating whether or not to accelerate its store development program. As of June 27, 1998, the Company operated 4,056 stores in 24 states and the District of Columbia, compared to 4,120 stores as of June 28, 1997. Net cash provided by financing activities increased to $100.1 million during the first six months of 1998, compared to net cash used in financing activities of $529.8 million during the first six months of 1997. The increase in 1998 was primarily due to the cash used during the second quarter of 1997 to retire certain Revco debt and to an increase in short-term borrowings during 1998. Year 2000 The Year 2000 issue relates to the inability of certain computer software programs to properly recognize and process date-sensitive information relative to the year 2000 and beyond. Since 1995, the Company has been actively addressing the Year 2000 issue to identify and modify or replace all impacted systems. Based on currently available information, management expects to identify and complete all modifications required to support the Year 2000 in a timely manner and believes that the cost of such modifications will not have a material impact on the Company's results of operations, liquidity or capital resources. The Company has also communicated with its key vendors and suppliers to identify the nature and potential impact of issues presented by the Year 2000 on the businesses of such vendors and suppliers. Management is not presently aware of any vendor or supplier-related issue presented by the Year 2000 that is likely to have a material impact on the Company. 17 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Discriminatory Pricing Litigation Against Drug Manufacturers The Company is a party to two lawsuits which have been filed against various pharmaceutical manufacturers and wholesalers. One lawsuit is a class action (of which CVS is a member of the class) that alleges conspiracy to fix and/or stabilize prices of prescription drugs sold to retail pharmacies by manufacturers and wholesalers in violation of the Sherman Antitrust Act (the "Class Action"). The other lawsuit was filed by individual chain pharmacies (including Revco) and alleges unlawful price discrimination against retail pharmacies by manufacturers and wholesalers in violation of the Robinson-Patman Act (the "Non-Class Action"). CVS became a party to the Non-Class Action upon its merger with Revco. With respect to the Class-Action, it was recently announced that four defendants had agreed to settlements aggregating approximately $350 million. Prior to this agreement, eleven other defendants had agreed to settlements aggregating approximately $370 million. There remains four defendants who are expected to settle or go to trial in mid-September 1998. Assuming settlements with the remaining defendants at similar levels, the total settlement could exceed $1 billion. Final approval by the court of the most recent settlements is pending, and the court must also approve a formula for distribution of the total proceeds to class members. While CVS' portion of any such total settlement of the Class Action would be significant, an exact dollar amount is difficult to predict at this time. With respect to the Non-Class Action, a few settlements have been reached to date and the case is expected to go to trial in the early part of 1999. The Company's portion of any settlement or judgment of the Non-Class Action could be significant. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires companies to report financial information based on how management internally organizes information to make operating decisions and assess performance. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." SFAS No. 132 revises the disclosure requirements for pensions and other postretirement benefit plans. This statement, however, does not change any of the measurement or recognition provisions required under previous guidance. Both statements are effective for fiscal years beginning after December 15, 1997. The Company is in the process of determining what impact, if any, these pronouncements will have on its financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," effective for fiscal years beginning after December 15, 1998. SOP 98-1 defines which costs incurred to develop or purchase internal-use software should be capitalized and which should be expensed. The Company is in the process of determining what impact, if any, this pronouncement will have on its financial statements. 18 Part I Item 2 ================================================================================ Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Concerning Forward Looking Statements We have made forward-looking statements in this Form 10-Q (as well as in other public filings, press releases and discussions with Company management) that are subject to risks and uncertainties. Forward-looking statements include the information concerning: future results of operations, revenues, sales growth, dispensing of retail prescriptions, cost savings and synergies of the Company following the merger with Revco and the merger with Arbor; the ability of the Company to continue to elevate the performance level of Revco stores following the merger with Revco; the ability of the Company to continue to achieve significant sales growth; the Company's belief that it can continue to improve operating performance by relocating existing stores to freestanding locations; the Company's belief that it can continue to reduce selling, general and administrative expenses as a percentage of net sales; the Company's belief that it can reduce inventory levels by the end of 1998; and the information concerning the ability of the Company and its key vendors and suppliers to successfully manage issues presented by the Year 2000; as well as those preceded by, followed by or that otherwise include the words: "believes," "expects," "anticipates," "intends," "estimates" or other similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this Form 10-Q (including the notes to the consolidated condensed financial statements included herein), in our Annual Report on Form 10-K for the year ended December 31, 1997, and in our other public filings, press releases and discussions with Company management, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements: materially adverse changes in economic conditions generally in the markets served by the Company; future regulatory and legislative actions affecting the Company and/or the chain-drug industry generally (such as the current Federal and state industry-wide inquiry into billing practices for Medicaid prescriptions); competition from other drugstore chains; from alternative distribution channels such as supermarkets, membership clubs, other retailers and mail order companies, and from third party plans; and the continued efforts of health maintenance organizations, managed care organizations, patient benefit management companies and other third party payors to reduce prescription drug costs. The forward-looking statements referred to above are also subject to uncertainties and assumptions relating to the operations and results of operations of the Company following the merger with Revco and the merger with Arbor, including: risks relating to the Company's ability to combine the businesses of three major corporations while maintaining current operating performance levels during the integration period and the challenges inherent in diverting the Company's management focus and resources from other strategic opportunities and from operational matters for an extended period of time; the Company's ability to continue to secure suitable new store locations on favorable lease terms as it seeks to open new stores and relocate a portion of its existing store base to freestanding locations; the Company's ability to continue to purchase inventory on favorable terms; the Company's ability to establish effective promotional and pricing strategies in the different geographic markets in which it operates; the Company's ability to attract, hire and retain suitable pharmacists and management personnel; relationships with suppliers; and the impact of inflation. 19 Part I Item 3 ================================================================================ Quantitative and Qualitative Disclosures About Market Risk The Company has not entered into any transactions using derivative financial or commodity instruments and believes that its exposure to market risk, principally interest rate risk inherent in its debt portfolio, is not material. 20 Part II Item 4 ================================================================================ Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of Security Holders at the Company's Annual Meeting of Shareholders held on Wednesday, May 13, 1998, in Woonsocket, Rhode Island:
==================================================================================================================== Broker For Against Abstained Non-Votes - -------------------------------------------------------------------------------------------------------------------- 1. The election, for one-year terms, of all persons nominated for directors, as set forth in the Company's proxy statement dated April 2, 1998, was approved by the following votes: Eugene Applebaum 162,501,602 596,637 -- -- Allan J. Bloostein 162,490,325 607,914 -- -- W. Don Cornwell 162,504,515 593,724 -- -- Thomas P. Gerrity 162,364,160 734,079 -- -- Stanley P. Goldstein 162,440,867 657,372 -- -- William H. Joyce 162,504,157 594,082 -- -- Terry R. Lautenbach 162,479,678 618,561 -- -- Terrence Murray 162,498,344 599,895 -- -- Sheli Z. Rosenberg 162,355,947 742,292 -- -- Thomas M. Ryan 162,498,599 599,640 -- -- Ivan G. Seidenberg 162,435,774 662,465 -- -- Thomas O. Thorsen 162,469,721 628,518 -- -- 2. The proposal to increase the number of authorized shares of the Company's common stock from 300 million shares to one billion shares was approved by the following vote: 138,937,157 23,417,220 743,862 14,951,406 3. The appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the year ending December 31, 1998 was approved by the following vote: 162,661,954 90,693 345,592 14,951,406 ====================================================================================================================
21 Part II Item 6 ================================================================================ Exhibits and Reports on Form 8-K Exhibits: 3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to CVS Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 3.1A Certificate of Amendment to the Amended and Restated Certificate of Incorporation, effective May 13, 1998 (incorporated by reference to Exhibit 4.1A to Registrant's Registration Statement No. 333-52055 on Form S-3/A dated May 18, 1998) 3.2 By-laws of the Registrant, as amended and restated 10.1 CVS Deferred Compensation Plan 10.2 Partnership Equity Program 11.1 Computation of Per Share Earnings (incorporated by reference to Note 6 to the consolidated condensed financial statements, included herein) 15.1 Letter re: Unaudited Interim Financial Information 27.1 Financial Data Schedule - June 27, 1998 27.2 Restated Financial Data Schedule - March 28, 1998 27.3 Restated Financial Data Schedule - December 31, 1997 27.4 Restated Financial Data Schedule - September 27, 1997 27.5 Restated Financial Data Schedule - June 28, 1997 27.6 Restated Financial Data Schedule - March 29, 1997 27.7 Restated Financial Data Schedule - December 31, 1996 27.8 Restated Financial Data Schedule - September 28, 1996 27.9 Restated Financial Data Schedule - June 29, 1996 27.10 Restated Financial Data Schedule - March 30, 1996 27.11 Restated Financial Data Schedule - December 31, 1995 Reports on Form 8-K: - -------------------- On April 3, 1998, the Registrant filed a Current Report on Form 8-K in connection with the Registrant's completion of the merger of CVS Corporation and Arbor Drugs, Inc. On May 8, 1998, the Registrant filed a Current Report on Form 8-K in connection with complying with a covenant contained in its Merger Agreement with Arbor Drugs, Inc. that required CVS to report interim results for a 30-day period following the effective time of the merger of CVS Corporation and Arbor Drugs, Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CVS Corporation (Registrant) /s/ Charles C. Conaway - ---------------------- CHARLES C. CONAWAY Executive Vice President and Chief Financial Officer August 11, 1998 22 EX-3.2 2 BY-LAWS EXHIBIT 3.2 BY-LAWS OF CVS CORPORATION (as amended May 13, 1998) ------------------- ARTICLE I STOCKHOLDERS Section 1. ANNUAL MEETING. The annual meeting of the stockholders of the corporation, for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting, shall be held at the principal office of the corporation, or at such other place within or without the State of Delaware stated in the notice of the meeting as the Board of Directors may determine, on the second Tuesday of May of each year (unless such day shall be a legal holiday, in which case the annual meeting shall be held on the next succeeding day not a legal holiday), or on such other day in the month of May as the Board of Directors may determine, at 10:00 o'clock in the forenoon, Rhode Island time, or at such other hour stated in the notice of the meeting as the Board of Directors may determine. Section 2. SPECIAL MEETINGS. Special meetings of stockholders may be called by the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer and may not be called by any other person. Special meetings shall be held at such place within or without the State of Delaware as is specified in the call thereof. Section 3. NOTICE OF MEETING; WAIVER. Unless otherwise required by statute, the notice of every meeting of the stockholders shall be in writing and signed by the Chairman of the Board of Directors or the Chief Executive Officer (or the President or a Vice President or the Secretary or an Assistant Secretary, in each case acting at the direction of the Chairman or the Chief Executive Officer) and shall state the time when and the place where it is to be held, and a copy thereof shall be served, either personally or by mail, upon each stockholder of record entitled to vote at such meeting, not less than ten nor more than sixty days before the meeting. If the meeting to be held is other than the annual meeting of stockholders, the notice shall also state the purpose or purposes for which the meeting is called and shall indicate that it is being issued by or at the direction of the person or persons calling the meeting. If, at any meeting, action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares pursuant to Section 262 of the General Corporation Law of the State of Delaware, the notice of such meeting shall include a statement of that purpose and to that effect. If the notice is mailed, it shall be directed to a stockholder at the stockholder's address as it appears on the record of stockholders unless the stockholder shall have filed with the Secretary of the corporation a written request that notices intended for the stockholder be mailed to some other address, in which case it shall be mailed to the address designated in such request. Notice of a meeting need not be given to any stockholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of a stockholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by the stockholder. Section 4. QUORUM. At any meeting of the stockholders the holders of a majority of the shares entitled to vote and being present in person or represented by proxy shall constitute a quorum for all purposes, unless the representation of a different number shall be required by law or by another provision of these by-laws, and in that case the representation of the number so required shall constitute a quorum. If the holders of the amount of shares necessary to constitute a quorum shall fail to attend in person or by proxy, the holders of a majority of the shares present in person or represented by proxy at the meeting may adjourn from time to time without further notice other than by an announcement made at the meeting. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 5. ORGANIZATION. The Chairman of the Board of Directors or, in his absence, the Chief Executive Officer or, in his absence, the President, any Executive Vice President, Senior Vice President or Vice President in the order of their seniority or in such other order as may be designated by the Board of Directors, shall call meetings of the stockholders to order and shall act as chairman of such meetings. The Board of Directors or the Executive Committee may appoint any stockholder to act as chairman of any meeting in the absence of any of such officers and in the event of such absence and the failure of such board or committee to appoint a chairman, the stockholders present at such meeting may nominate and appoint any stockholder to act as chairman. The Secretary of the corporation, or, in his absence, an Assistant Secretary, shall act as secretary of all meetings of stockholders, but, in the absence of said officers, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 6. VOTING. At each meeting of the stockholders every stockholder of record having the right to vote shall be entitled to vote either in person or by proxy. Section 7. ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. Written consent thus given by 2 the holders of all outstanding shares entitled to vote shall have the same effect as a unanimous vote of the stockholders. Section 8. INSPECTORS OF ELECTION. The Board of Directors, in advance of any stockholders' meeting, may appoint one or more Inspectors of Election to act at the meeting or any adjournment thereof. If Inspectors are not so appointed, the person presiding at a stockholders' meeting may, and on the request of any stockholder entitled to vote thereat, shall appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. Inspectors shall be sworn. Section 9. CONDUCT OF ELECTION. At each meeting of the stockholders, votes, proxies, consents and ballots shall be received, and all questions touching the qualification of voters, the validity of proxies and the acceptance or rejection of votes, shall be decided by the Inspectors of Election. ARTICLE II BOARD OF DIRECTORS Section 1. NUMBER OF DIRECTORS. The number of directors of the corporation shall be not less than three nor more than eighteen, as determined by action of the Board of Directors. Section 2. TERM AND VACANCIES. Directors shall be elected at the annual meeting of stockholders to hold office until the next annual meeting and until their respective successors have been duly elected and have qualified. Vacancies in the Board of Directors occurring between annual meetings, from any cause whatsoever including vacancies created by an increase in the number of directors, shall be filled by the vote of a majority of the remaining directors, though less than a quorum. Directors need not be stockholders. Section 3. GENERAL POWERS OF DIRECTORS. The business of the corporation shall be managed under the direction of its Board of Directors subject to the restrictions imposed by law, by the corporation's certificate of incorporation and amendments thereto, or by these by-laws. Section 4. MEETINGS OF DIRECTORS. The directors may hold their meetings and may keep an office and maintain the books of the corporation, except as otherwise provided by statute, in such place or places in the State of Delaware or outside the State of Delaware as the Board may, from time to time, determine. 3 Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all of the directors consent in writing to the adoption of a resolution authorizing the action, and in such event the resolution and the written consent of all directors thereto shall be filed with the minutes of the proceedings of the Board of Directors. Any one or more directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at the principal office of the corporation in the County of Providence, Town of Woonsocket, State of Rhode Island, or at such other place within or without the State of Delaware as shall be designated in the notice of the meeting as follows: One meeting shall be held immediately following the annual meeting of stockholders and further meetings shall be held at such intervals or on such dates as may from time to time be fixed by the directors, all of which meetings shall be held upon not less than four days' notice served upon each director by mailing such notice to the director at the director's address as the same appears upon the records of the corporation, except the meeting which shall be held immediately following the annual meeting of stockholders which meeting shall be held without notice. Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by the direction of the Chairman of the Board of Directors, or of the Chief Executive Officer of the corporation, or of one-third of the directors at the time in office. The Secretary shall give notice of each special meeting by mailing such notice not less than four days, or by telegraphing or telecopying such notice not less than two days, before the date set for a special meeting, to each director. Section 7. WAIVER. Notice of a meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. Section 8. QUORUM. One-third of the total number of directors shall constitute a quorum for the transaction of business, but if at any meeting of the Board there be less than a quorum present, the majority of those present may adjourn the meeting from time to time. Section 9. ORDER OF BUSINESS. At meetings of the Board of Directors business shall be transacted in such order as the Board may fix and determine. 4 At all meetings of the Board of Directors, the Chairman of the Board of Directors, or in his absence, the Chief Executive Officer, or in the absence of both, the President, any Executive Vice President or any Vice President (provided such person be a member of the Board) shall preside. Section 10. ELECTION OF CHAIRMAN, OFFICERS AND COMMITTEES. At the first regular meeting of the Board of Directors in each year, at which a quorum shall be present, held next after the annual meeting of the stockholders, the Board of Directors shall proceed to the election of the executive officers of the corporation (including the Chairman of the Board), and of the Executive Committee, if the Board of Directors shall provide for such committee under the provisions of Article III hereof. The Board of Directors from time to time may fill any vacancies among the executive officers, members of the Executive Committee and members of other committees, and may appoint additional executive officers and additional members of such Executive Committee or other committees. Section 11. COMPENSATION. Directors who are not officers or employees of the corporation or any of its subsidiaries may receive such remuneration as the Board may fix, in addition to a fixed sum for attendance at each regular or special meeting of the Board or a Committee of the Board; provided, however, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity or receiving compensation therefor. In addition, each director shall be entitled to reimbursement for expenses incurred in attending any meeting of the Board or Committee thereof. ARTICLE III COMMITTEES Section 1. EXECUTIVE COMMITTEE. The Board of Directors by resolution adopted by a majority of the entire Board, may designate from the Directors an Executive Committee consisting of three or more, to serve at the pleasure of the Board. At all times when the Board of Directors is not in session, the Executive Committee so designated shall have and exercise the powers of the Board of Directors, except that such committee shall have no authority as to the matters set out in Section 3 of this Article III. Meetings of the Executive Committee shall be called by any member of the same, on three days' mailed notice, or one day's telegraphed or telecopied notice to each of the other members, stating therein the purpose for which such meeting is to be held. Notice of meeting may be waived, in writing, by any member of the Executive Committee. All action by the Executive Committee shall be recorded in its minutes and reported from time to time to the Board of Directors. 5 The Executive Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Any action required or permitted to be taken by the Executive Committee may be taken without a meeting if all of the members of the Executive Committee consent in writing to the adoption of a resolution authorizing the action, and in such event the resolution and the written consent of all members of the Executive Committee thereto shall be filed with the minutes of the proceedings of the Executive Committee. Any one or more members of the Executive Committee may participate in a meeting of the Executive Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. Section 2. OTHER COMMITTEES. The Board of Directors may appoint such other committees, of three or more, as the Board shall, from time to time, deem advisable, which committees shall have and may exercise such powers as shall be prescribed, from time to time, by resolution of the Board of Directors, except that such committees shall have no authority as to the matters set out in Section 3 hereof. Actions and recommendations by each committee which shall be appointed pursuant to this section shall be recorded and reported from time to time to the Board of Directors. Each such committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Any action required or permitted to be taken by any such committee may be taken without a meeting if all of the members of such committee consent in writing to the adoption of a resolution authorizing the action, and in such event the resolution and the written consent of all members of such committee thereto shall be filed with the minutes of the proceedings of such committee. Any one or more members of any such committee may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. Section 3. LIMITATIONS. No committee shall have authority as to the following matters: (1) The submission to stockholders of any action that needs stockholders' authorization. 6 (2) The filling of vacancies in the Board of Directors or in any committee. (3) The fixing of compensation of the directors for serving on the Board or on any committee. (4) The amendment or repeal of the by-laws, or the adoption of new by-laws. (5) The amendment or repeal of any resolution of the Board which by its terms shall not be so amendable or repealable. Section 4. ALTERNATES. The Board may designate one or more directors as alternate members of any such committees, who may replace any absent member or members at any meeting of such committees. Section 5. COMPENSATION. Members of special or standing committees may receive such salary for their services as the Board of Directors may determine; provided, however, that nothing herein contained shall be construed to preclude any member of any such committee from serving the corporation in any other capacity or receiving compensation therefor. ARTICLE IV OFFICERS Section 1. TITLES AND TERMS OF OFFICE. The executive officers of the corporation shall be a Chairman of the Board of Directors, a Chief Executive Officer and a President, each of whom shall be a member of the Board of Directors, such number of Executive Vice Presidents, Senior Vice Presidents and Vice Presidents as the Board of Directors shall determine, and a Controller, a Treasurer and a Secretary, all of whom shall be chosen by the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries and one or more Assistant Treasurers, and such other junior officers as it shall deem necessary, who shall have such authority and shall perform such duties as from time to time may be prescribed by the Board of Directors. Any two or more offices except President and Vice President may be held by the same person. The officers of the corporation shall each hold office for one year and until their successors are chosen and qualified, and shall be subject to removal at any time by the affirmative vote of the majority of the entire Board of Directors. Section 2. CHAIRMAN OF THE BOARD. The Board of Directors shall designate a Chairman of the Board (or one or more Co-Chairmen of the Board). The 7 Chairman of the Board shall preside over the meetings of the Board of Directors and of the stockholders at which he will be present. If there be more than one, the Co-Chairmen designated by the Board of Directors will perform such duties. The Chairman or Chairmen of the Board shall perform such other duties as may be assigned to him or them by the Board of Directors. Section 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the corporation shall have general management and control over the policy, business and affairs of the corporation and shall have such other authority and perform such other duties as usually appertain to a chief executive officer of a business corporation. He shall exercise the powers of the Chairman of the Board of Directors during his absence or inability to act. Section 4. PRESIDENT. The President, if any, shall have such authority and shall perform such duties as the Board of Directors, the Executive Committee, or the Chief Executive Officer may from time to time determine. Section 5. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. The Executive Vice Presidents, Senior Vice Presidents and Vice Presidents, if any, shall be designated and shall have such powers and perform such duties as may be assigned to them by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President. They shall, in order of their seniority or in such other order as may be designated by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President, exercise the powers of the Chief Executive Officer during the absence or inability to act of the Chief Executive Officer and the President. Section 6. CHIEF FINANCIAL OFFICER. A Chief Financial Officer or other officer designated by the Board of Directors shall be the principal financial officer of the corporation. He shall render to the Board of Directors, whenever the Board may require, an account of the financial condition of the corporation, and shall do and perform such other duties as from time to time may be assigned to him by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President. Section 7. CONTROLLER. A Controller or other officer designated by the Board of Directors shall be the principal accounting officer of the corporation and, subject to the direction of the Chief Financial Officer, he shall have supervision over all the accounts and account books of the corporation. He shall have such other powers and perform such other duties as from time to time may be assigned to him by the Chief Financial Officer, and shall exercise the powers of the Chief Financial Officer during his absence or inability to act. Section 8. TREASURER. The Treasurer shall have custody of the funds and securities of the corporation which come into his hands. When necessary or proper, he may endorse on behalf of the corporation for collection, checks, notes, and other 8 instruments and obligations and shall deposit the same to the credit of the corporation in such bank or banks or depositories as the Board of Directors or the Executive Committee shall designate; whenever required by the Board of Directors or the Executive Committee, he shall render a statement of his cash account; he shall keep, or cause to be kept, books of account, in which shall be entered and kept full and accurate accounts of all monies received and paid out on account of the corporation; he shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, the Executive Committee, the Chief Executive Officer, the President and the Chief Financial Officer; he shall give bond for the faithful discharge of his duties, if, as, and when the Board of Directors or the Executive Committee may require. He shall perform such other duties as from time to time may be assigned to him by the Board of Directors, the Executive Committee, the Chief Executive Officer, the President or the Chief Financial Officer. Section 9. ASSISTANT TREASURER. Each Assistant Treasurer shall have such powers and perform such duties as may be delegated to him, and the Assistant Treasurers shall, in the order of their seniority, or in such other order as may be designated by the Board of Directors, the Executive Committee, the Chief Executive Officer, the President or the Chief Financial Officer, exercise the powers of the Treasurer during his absence or inability to act. Section 10. SECRETARY. The Secretary shall keep the minutes of all meetings of the Board of Directors and the minutes of all meetings of the stockholders and of the Executive Committee, in books provided for that purpose; he shall attend to the giving and serving of all notices of the corporation; and he shall have charge of the certificate books, transfer books and records of stockholders and such other books and records as the Board of Directors or Executive Committee may direct, all of which shall at all reasonable times be open to the inspection of any director upon application during the usual business hours. He shall keep at the office of the corporation, or at the office of the transfer agent or registrar of the corporation's capital stock, a record containing the names, alphabetically arranged, of all persons who are stockholders of the corporation, showing their places of residence, the number of shares held by them, respectively, the time when they respectively became the owners thereof, and the amount paid thereon, and such record shall be open for inspection as prescribed by Section 220 of the General Corporate Law of the State of Delaware. He shall in general perform all the duties incident to the office of Secretary, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board of Directors, the Chief Executive Officer and the President. Section 11. ASSISTANT SECRETARIES. Each Assistant Secretary shall have such powers and perform such duties as may be delegated to him, and the Assistant Secretaries shall, in the order of their seniority, or in such other order as may be designated by the Board of Directors, the Executive Committee, the Chairman of the 9 Board of Directors, the Chief Executive Officer or the President, exercise the powers of the Secretary during his absence or inability to act. Section 12. VOTING UPON STOCKS. Unless otherwise ordered by the Board of Directors or by the Executive Committee, the Chief Executive Officer of the corporation, or one designated in a proxy executed by him, and in the absence of either, the President, or a person designated in a proxy executed by him, and in the absence of all such, the Executive Vice Presidents, Senior Vice Presidents or the Vice Presidents of the corporation, in the order of their seniority, shall have full power and authority on behalf of the corporation to attend, and to act, and to vote at meetings of stockholders of any corporation in which this corporation may hold stock, and each such officer of the corporation shall have power to sign a proxy deputizing others to vote the same; and all such who shall be so authorized to vote shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as the owner thereof, the corporation might have possessed and exercised, if present. The Board of Directors or the Executive Committee may, by resolution from time to time, confer like powers on any other person or persons which shall supersede the powers of those designated in the foregoing paragraph. Section 13. EXECUTION OF CHECKS, ETC. All checks, notes, drafts or other instruments for the payment of money shall be signed on behalf of this corporation by such person or persons and in such manner as the Board of Directors or Executive Committee may prescribe by resolution from time to time. ARTICLE V STOCK; RECORD DATE Section 1. CERTIFICATES FOR STOCK. The certificates for shares of the stock of the corporation shall be in such form as shall be proper or approved by the Board of Directors. Each certificate shall state (i) that the corporation is formed under the laws of the State of Delaware, (ii) the name of the person or persons to whom issued, (iii) the number and class of shares and the designation of the series, if any, which such certificate represents and (iv) the par value, if any, of each share represented by such certificate. Each certificate shall be signed by the Chairman of the Board of Directors, the President, an Executive Vice President or a Vice President, and also by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary and sealed with the corporation's seal; provided, however, that if such certificates are signed by a transfer agent or transfer clerk and by a registrar the signature of the Chairman of the Board of Directors, the President, an Executive Vice President, Vice President, Treasurer, Assistant Treasurer, Secretary and Assistant Secretary and the seal of the corporation upon such certificates may be facsimiles, engraved or printed. 10 Section 2. TRANSFER OF SHARES. Shares of the stock of the corporation may be transferred on the record of stockholders of the corporation by the holder thereof in person or by his duly authorized attorney upon surrender of a certificate therefor properly endorsed. Section 3. AUTHORITY FOR ADDITIONAL RULES REGARDING TRANSFER. The Board of Directors and the Executive Committee shall have power and authority to make all such rules and regulations as respectively they may deem expedient concerning the issue, transfer and registration of such certificates for shares of the stock of the corporation as well as for the issuance of new certificates in lieu of those which may be lost or destroyed, and may require of any stockholder requesting replacement of lost or destroyed certificates, bond in such amount and in such form as they may deem expedient to indemnify the corporation, and/or the transfer agents, and/or the registrars of its stock against any claims arising in connection therewith. Section 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors or Executive Committee may appoint one or more transfer agents and one or more registrars of transfer and may require all stock certificates to be countersigned by such transfer agent and registered by such registrar of transfers. One person or organization may serve as both transfer agent and registrar. Section 5. RECORD DATE. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors shall fix in advance a date as the record date for any such determination of stockholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. Section 6. LIST OF STOCKHOLDERS AS OF RECORD DATE. The Secretary of the corporation or the transfer agent of its stock shall make and certify a list of the stockholders as of the record date and number of shares of each class of stock of record in the name of each stockholder and such list shall be present at every meeting of stockholders. If the right to vote at any meeting is challenged, the inspectors of elections, or person presiding thereat, shall require such list of stockholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be stockholders entitled to vote thereat, may vote at such meeting. Section 7. DIVIDENDS. Dividends may be declared and paid out of the surplus of the corporation as often and at such times and to such extent as the Board of Directors may determine, consistent with the provisions of the certificate of incorporation of the corporation. 11 ARTICLE VI CORPORATE SEAL The Board of Directors shall provide a suitable seal containing the name of the corporation and of the state under the laws of which the corporation was incorporated; and the Secretary shall have the custody thereof. ARTICLE VII AMENDMENTS Section 1. These by-laws or any of them, may be altered, amended or repealed, or new by-laws may be made by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors. 12 EX-10.1 3 DEFERRED COMPENSATION CVS CORPORATION --------------- Deferred Compensation Plan -------------------------- (as amended April 29, 1998) --------------------------- TABLE OF CONTENTS ================================================================================
ARTICLE I INTRODUCTION 1.01 Name of Plan...........................................................................1 1.02 Purpose of Plan........................................................................1 1.03 "Top Hat" Pension Benefit Plan.........................................................1 1.04 Funding................................................................................1 1.05 Effective Date.........................................................................1 1.06 Administration.........................................................................1 1.07 Number and Gender......................................................................1 1.08 Headings...............................................................................2 ARTICLE II DEFINITIONS 2.01 Account................................................................................3 2.02 Annual Cash Incentive Compensation.....................................................3 2.03 Annual Cash Incentive Deferral.........................................................3 2.04 Base Salary............................................................................3 2.05 Base Salary Deferral...................................................................3 2.06 Beneficiary............................................................................3 2.07 Board..................................................................................3 2.08 Change in Control......................................................................4 2.09 Code...................................................................................5 2.10 Company................................................................................5 2.11 Company Contribution...................................................................5 2.12 Compensation Committee.................................................................5 2.13 CVS Corporation Future Fund............................................................5 2.14 Deferred Compensation Election.........................................................5 2.15 Effective Date.........................................................................5 2.16 Employee...............................................................................5 2.17 ERISA..................................................................................5 2.18 401(k) Plan............................................................................5 2.19 Melville Deferred Compensation Plan....................................................5 2.20 Participant............................................................................6 2.21 Plan...................................................................................6 2.22 Plan Committee.........................................................................6 2.23 Plan Year..............................................................................6 2.24 Retirement Date........................................................................6 2.25 Specific Future Year...................................................................6 2.26 Other Cash Incentive or Bonus Compensation.............................................6 2.27 Other Cash Incentive or Bonus Deferral.................................................6
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ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 Eligibility............................................................................7 3.02 Commencement of Participation..........................................................7 3.03 Cessation of Active Participation......................................................7 ARTICLE IV DEFERRALS & COMPANY CONTRIBUTIONS 4.01 Deferral Amounts.......................................................................8 4.02 Effective Date of Deferred Compensation Elections......................................8 4.03 Modification or Revocation of Election by Participant..................................8 4.04 Company Contributions..................................................................9 4.05 Deferral and Contribution Timing......................................................10 4.06 Balances Transferred from the Melville Deferred Compensation Plan.....................10 ARTICLE V ACCOUNTS 5.01 Establishment of Bookkeeping Accounts.................................................11 5.02 Subaccounts...........................................................................11 5.03 Hypothetical Nature of Accounts.......................................................11 5.04 Vesting...............................................................................11 5.05 Deferral Crediting Options............................................................11 5.06 Hypothetical Gains or Losses..........................................................12 ARTICLE VI DISTRIBUTION OF ACCOUNT 6.01 Normal Distributions..................................................................13 6.02 Form of Payment.......................................................................14 6.03 Disability Distributions..............................................................14 6.04 Distributions in the Event of Death...................................................14 6.05 Distributions for Termination Other Than Retirement, Death or Disability..............15 6.06 Account Valuation Upon a Distribution.................................................15 6.07 Designation of Beneficiary............................................................15 6.08 Unclaimed Benefits....................................................................15 6.09 Hardship Withdrawals..................................................................15 6.10 Other Withdrawals.....................................................................16 6.11 Balances Transferred from the Melville Deferred Compensation Plan.....................16
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ARTICLE VII ADMINISTRATION 7.01 Plan Committee........................................................................17 7.02 General Powers of Administration......................................................17 7.03 Costs of Administration...............................................................17 7.04 Indemnification of Plan Committee.....................................................17 ARTICLE VIII CLAIMS PROCEDURE 8.01 Claims................................................................................18 8.02 Claim Decision........................................................................18 8.03 Request for Review....................................................................18 8.04 Review of Decision....................................................................19 ARTICLE IX MISCELLANEOUS 9.01 Not Contract of Employment............................................................20 9.02 Non-Assignability of Benefits.........................................................20 9.03 Withholding...........................................................................20 9.04 Amendment and Termination.............................................................20 9.05 No Trust Created......................................................................21 9.06 Unsecured General Creditor Status of Employee.........................................21 9.07 Severability..........................................................................21 9.08 Governing Laws........................................................................21 9.09 Binding Effect........................................................................22 9.10 Entire Agreement......................................................................22
ARTICLE I INTRODUCTION 1.01 Name of Plan. CVS Corporation (the "Corporation") hereby adopts the CVS Deferred Compensation Plan (the "Plan"). 1.02 Purpose of Plan. The purpose of the Plan is to provide certain eligible employees of the Company the opportunity to defer elements of their compensation which might not otherwise be deferrable under other Company plans, including the 401(k) portion of CVS Corporation Future Fund (the "401(k)Plan"), and to receive the benefit of additions to their deferral comparable to those obtainable under the 401(k) Plan in the absence of certain restrictions and limitations in the Internal Revenue Code. In addition, deferral accounts under the Melville Deferred Compensation Plan will be merged into this plan. 1.03 "Top Hat" Pension Benefit Plan. The Plan is an "employee pension benefit plan" within the meaning of ERISA. However, the Plan is unfunded and maintained for a select group of management or highly compensated employees and, therefore, it is intended that the Plan will be exempt from Parts 2, 3 and 4 of Title 1 of ERISA. The Plan is not intended to qualify under Code section 401(a). 1.04 Funding. The Plan is unfunded. All benefits will be paid from the general assets of the Company. 1.05 Effective Date. The Plan is effective as of January 1, 1997. 1.06 Administration. The Plan shall be administered by the Plan Committee, as defined in Article II. 1.07 Number and Gender. Wherever appropriate herein, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender. The feminine gender, where appearing in the Plan, shall be deemed to include the masculine gender. 1.08 Headings. The headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. ARTICLE II 1 DEFINITIONS For purposes of the Plan, the following words and phrases shall have the meanings set forth below, unless their context clearly requires a different meaning: 2.01 Account means the bookkeeping account maintained by the Company on behalf of each Participant pursuant to this Plan. 2.02 Annual Cash Incentive Compensation means the amount awarded to a Participant in cash for a Plan Year under any annual incentive plan maintained by the Company. 2.03 Annual Cash Incentive Deferral means the amount of a Participant's Annual Cash Incentive Compensation which the Participants elect to have withheld on a pretax basis from their Annual Cash Incentive Compensation and credited to their Account pursuant to this Plan. 2.04 Base Salary means the base rate of cash compensation paid by the Company to or for the benefit of a Participant for services rendered or labor performed while a Participant, including base pay a Participant could have received in cash in lieu of: (a) deferrals pursuant to this Plan, and (b) contributions made on the Participant's behalf to any qualified plan maintained by the Company or to any cafeteria plan under Section 125 of the Code maintained by the Company. 2.05 Base Salary Deferral means the amount of a Participant's Base Salary which the Participants elect to have withheld on a pretax basis from Base Salary and credited to their Account pursuant to this Plan. 2.06 Beneficiary means the person or persons designated by the Participant in accordance with the provisions of this Plan. 2.07 Board means the Board of Directors of CVS Corporation. 2.08 Change in Control means the happening of any of the following events: (a) any person (other than the Corporation, any trustee or other fiduciary holding securities under any employee benefit plan of the Corporation, or any company owned, directly or indirectly, by the stockholders of the Corporation 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 Corporation) 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 Corporation or any Significant Subsidiary (as defined below), representing 25% or more of the combined voting power of the Corporation's or such subsidiary's then outstanding securities; 2 (b) 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 Corporation 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 Corporation'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; (c) the consummation of a merger or consolidation of the Corporation or any subsidiary owning directly or indirectly all or substantially all of the consolidated assets of the Corporation (a "Significant Subsidiary") with any other entity, other than a merger or consolidation which would result in the voting securities of the Corporation 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; (d) the stockholders of the Corporation approve a plan or agreement for the sale or disposition of all or substantially all of the consolidated assets of the Corporation (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of the common stock of the Corporation 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 (e) any other event occurs which the Board determines, in its discretion, would materially alter the structure of the Corporation or its ownership. For purposes of this definition: (1) The term "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including any successor to such Rule). (2) The term "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (3) The term "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, 3 including "group" as defined in Section 13(d) thereof. 2.09 Code means the Internal Revenue Code of 1986, as amended. 2.10 Company means CVS Corporation and any successor thereof with respect to its employees and any subsidiary or affiliated company authorized by the Compensation Committee to participate in the plan with respect to their employees. 2.11 Company Contribution means the amount, as determined by the Company on an annual basis based on the provisions of this Plan, credited by the Company to the Account of each Participant based on such Participant's Base Salary Deferral. 2.12 Compensation Committee means the Compensation Committee of the Board of Directors. 2.13 CVS Corporation Future Fund means the Profit Sharing, 401(k) and Employee Stock Option Plans of CVS Corporation and affiliated Companies. 2.14 Deferred Compensation Election means the written election as prescribed by the Plan Committee, regardless of how it may be titled. This election is made by the Participant and constitutes the agreement entered into between the Company and a Participant for participation in the Plan. The Participants elect the terms of their deferral pursuant to the provisions of this Plan. 2.15 Effective Date means January 1, 1997. 2.16 Employee means any common-law employee of the Company. 2.17 ERISA means the Employee Retirement Income Security Act of 1974, as amended. 2.18 401(k) Plan means the 401(k) portion of CVS Corporation Future Fund. 2.19 Melville Deferred Compensation Plan means The Deferred Compensation Plan as adopted by The Melville Corporation. 2.20 Participant means each Employee participating in the Plan pursuant to Article III. 2.21 Plan means the CVS Deferred Compensation Plan, as amended from time to time. 2.22 Plan Committee means the administrative committee approved by the Compensation Committee of the Board of Directors to administer the Plan in accordance with the provisions of this Plan. 2.23 Plan Year means the calendar year ending on December 31. 2.24 Retirement Date means the date the Participant is eligible for and retires under CVS 4 Corporation Future Fund, or any successor plan thereto, and is entitled to receive benefits from said plan. 2.25 Specific Future Year means a calender year in the future voluntarily elected by a Participant to begin distribution of Account(s) pursuant to this Plan. 2.26 Other Cash Incentive or Bonus Compensation means the amount awarded to a Participant in cash during any Plan Year other than awards under any annual incentive plan maintained by the Company, including, but not limited to, hiring bonuses and special recognition awards. 2.27 Other Cash Incentive or Bonus Deferral means the amount of a Participant's Other Cash Incentive or Bonus Compensation which the Participant elects to have withheld on a pretax basis from Other Cash Incentive or Bonus Compensation and credited to their Account pursuant to this Plan. 5 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 Eligibility. Employees who are eligible for participation in the Plan are: (a) those that earn Base Salary equal to or greater than $100,000, as adjusted from time to time by the Plan Committee, or (b) certain key employees the Plan Committee may designate to participate in the Plan at its discretion. Employees must also be subject to the income tax laws of the United States in order to be eligible for participation in the Plan. The Plan Committee shall notify Employees of their selection as eligible Participants. Subject to the provisions of Section 3.03 below, a Participant shall remain eligible to continue participation in the Plan for each Plan Year following his or her initial year of participation in the Plan. 3.02 Commencement of Participation. An Employee shall become a Participant effective as of the date the Plan Committee grants eligibility and that Employee's first Deferred Compensation Election becomes effective. Participants in the Melville Deferred Compensation Plan will be Participants in this Plan as existing account balances in the Melville Deferred Compensation Plan are merged with this Plan. 3.03 Cessation of Active Participation. Notwithstanding any provision herein to the contrary, an individual who has become a Participant in the Plan shall cease to be a Participant hereunder effective as of any date designated by the Plan Committee. Any such Plan Committee action shall be communicated to such Participant prior to the effective date of such action. If a Participant's Base Salary falls below the minimum from Section 3.01(a) above, the Participant will not be allowed to defer additional amounts into the Plan until such time as his or her Base Salary meets the minimum requirement. Existing amounts in the Participant's Account will be maintained according the normal provisions of the Plan. 6 ARTICLE IV DEFERRALS & COMPANY CONTRIBUTIONS 4.01 Deferral Amounts. Before the first day of each Plan Year (or the remaining portion thereof for an Employee who first becomes eligible to participate in the Plan other than on the first day of a Plan Year), a Participant may file with the Plan Committee a Deferred Compensation Election. The Participant may defer up to 50% of Base Salary or up to 100% of Annual Cash Incentive Compensation or up to 100% of Other Cash Incentive or Bonus Compensation. 4.02 Effective Date of Deferred Compensation Elections. A Participant's Deferred Compensation Election shall be effective as of the first day of the Plan Year to which it relates. If an employee becomes eligible to participate after December 31, he or she may elect to defer Base Salary and/or Annual Cash Incentive for that year by filing a Deferred Compensation Election with the Plan Committee prior to the close of business on the thirtieth day following the date he or she becomes eligible to participate in the Plan, provided, however, that Annual Cash Incentive Compensation may be deferred only if the amount earned for that year has not already been determined by appropriate action of the Compensation Committee. If the Participant enters the Plan other than on the first day of a Plan Year, the Deferred Compensation Election shall be effective as of the first day of the first payroll period after the date the Participant files said Election with the Plan Committee. All eligible Employees must complete the Deferred Compensation Election form, even if electing not to participate. In the event a Participant fails to complete a Deferred Compensation Election on or before the date the Participant commences participation in the Plan or the first day of any Plan Year, the Participant shall be deemed to have elected not to make a deferral for such Plan Year (or remaining portion thereof if the Participant enters the Plan other than on the first day of a Plan Year). 4.03 Modification or Revocation of Election by Participant. A Participant's Deferred Compensation Election is irrevocable. However, a Participant may discontinue a Base Salary Deferral at any time by filing a revised Deferred Compensation Election which must be approved by the Plan Committee, and subject to proof of hardship or other such limitations and restrictions as the Plan Committee may prescribe in its sole discretion. If approved by the Plan Committee, revocation shall take effect as of the first day of the next payroll period after its filing. If Participants discontinue a Base Salary Deferral election during a Plan Year, they will not be permitted to elect Base Salary Deferral again until the next Plan Year. A Participant may only discontinue or reduce deferral of an Annual Cash Incentive Compensation election or an Other Cash Incentive or Bonus Compensation Election by a 7 showing of a severe financial hardship in accordance with the provisions of this Plan. Under no circumstances may a Participant's Deferred Compensation Election be made, modified or revoked retroactively. 4.04 Company Contributions. There are three types of Company Contributions in the Plan. (a) Restoration of Lost 401(k) Match. The Participant must defer Base Salary to be eligible for this contribution in any amount. The purpose of this contribution is to restore any 401(k) Plan match lost as a result of participation in this Plan. The contribution for this Section is equal to the matching percentage the Participant is eligible for in the 401(k) Plan times the percentage the Participant is deferring into the 401(k) Plan, up to a maximum of four (4) percent, times matchable compensation. Matchable compensation for purposes of this Section 4.04(a) is equal to the lesser of Base Salary or the Qualified Compensation Limit (as defined in Section 401(a)(17) of the Internal Revenue Code) minus the result of: Base Salary for the Plan Year minus the Base Salary deferred in the Plan Year. Matchable compensation for purposes of this Section 4.04(a) may not be less than zero. (b) Deferral Plan Match. The Participant must defer Base Salary to be eligible for this contribution. The purpose of this contribution is to restore any 401(k) match lost as a result of the Qualified Compensation Limit. The contribution for this Section is equal to the matching percentage the Participant is eligible for in the 401(k) Plan times the percentage of Base Salary the Participant is deferring into this Plan, up to a maximum of four (4) percent, times matchable compensation. Matchable compensation for purposes of this Section 4.04(b) is equal (1) minus (2) as defined below. (1) The greater of the Participant's Base Salary or the Qualified Compensation Limit. (2) The Qualified Compensation Limit. (c) Restoration of CVS Corporation Future Fund Profit Sharing Contributions. At the sole discretion of the Plan Committee, contributions may be made to this Plan to restore any contributions that are limited in the CVS Corporation Future Fund Profit Sharing Plan as a result of IRS limitations, qualified plan discrimination limitations, participation in the 401(k) Plan or this Plan. 4.05 Deferral and Contribution Timing. Base Salary deferrals will be credited to the Account of each Participant as of the date of 8 the pay check from which the deferral was withheld. A Participant whose employment terminates during a pay period will cease deferral withholding effective as of the first day of the following payroll period. Annual Cash Incentive Deferrals and/or Other Cash Incentive or Bonus Deferrals will be credited to the Account of each Participant as of the day of which such Annual Cash Incentive Compensation and/or Other Cash Incentive or Bonus Compensation otherwise would have been paid to the Participant in cash, provided that the Participant is an Employee on such date. Company Contributions for the Restoration of Lost 401(k) Match pursuant to Section 4.04(a) above and Deferral Plan Match pursuant to Section 4.04(b) above will be credited to the Participant's Account on a monthly basis. Company Contributions for Restoration of CVS Corporation Future Fund Profit Sharing Contributions pursuant to Section 4.04(c) above will be credited to the Participant's Account as of the date the profit sharing Contribution is contributed to the CVS Corporation Future Fund. 4.06 Balances Transferred from the Melville Deferred Compensation Plan. Each Participant in the Melville Deferred Compensation Plan will be required to make a Deferred Compensation Election(s) on a special form, as determined by the Plan Committee, that relates to that Participant's balances in the Melville Deferred Compensation Plan. Such Deferred Compensation election will be effective as of the merger of the Melville Deferred Compensation Plan into this Plan. The balances from the Melville Deferred Compensation Plan will be credited to the Participant's Account as of the date the Melville Deferred Compensation Plan is merged into the Plan, subject to the provisions in Article 6.11. 9 ARTICLE V ACCOUNTS 5.01 Establishment of Bookkeeping Accounts. A separate bookkeeping account shall be maintained for each Participant. Such account shall be credited with the deferrals made by the Participant pursuant to this Plan and credited (or charged, as the case may be) with the hypothetical investment results determined pursuant to this Article of the Plan. 5.02 Subaccounts. Within each Participant's bookkeeping account, separate subaccounts shall be maintained to the extent necessary for the administration of the Plan. Generally, a subaccount will be set up for each year and for each Deferred Compensation Election the Participant makes. 5.03 Hypothetical Nature of Accounts. The accounts established under this Article shall be hypothetical in nature and shall be maintained for bookkeeping purposes only so that hypothetical gains or losses on the deferrals made to the Plan can be credited (or charged, as the case may be). Neither the Plan nor any of the accounts, or subaccounts, established hereunder shall hold any actual funds or assets. The right of any person to receive one or more payments under the Plan shall be an unsecured claim against the general assets of the Company. Any liability of the Company to any Participant, former Participant, or Beneficiary with respect to a right to payment shall be based solely upon contractual obligations created by the Plan. Neither the Company, the Board, nor any other person shall be deemed to be a trustee of any amounts to be paid under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and a Participant or any other Person. 5.04 Vesting. Participants shall be 100% vested in their Account, including Company Contributions, at all times. 5.05 Deferral Crediting Options. Deferral Crediting Options are similar to investment choices in a qualified 401(k) plan and the stock units under the Partnership Equity Plan, except that they are hypothetical in nature and no funds are actually held in the plan. Deferral Crediting Options determine the hypothetical gain or loss to be reflected in the Participant Accounts. The Deferral Crediting Options offered to Participants are determined by the Plan Committee at its sole discretion. The Plan Committee specifically retains the right to change the Deferral Crediting Options at any time, in its sole discretion. The Deferral Crediting Options that will be offered initially will be the same as the investment choices 10 offered in CVS Corporation Future Fund, except for CVS Preference Stock, and will function similarly to said investment choices; provided, however, with respect to the amounts transferred from the Melville Deferred Compensation Plan an additional investment choice shall be Corporate Common Stock under the Partnership Equity Plan. The Deferred Compensation Election will provide for the election of the allocation of deferral amounts into the Deferral Crediting Options at the time of election. Participants may change the allocation of deferrals credited to their account once per calendar month beginning with February in the Plan Year for which the most recent annual election process was held. Participants may reallocate their existing Account, or subaccount(s), among the Deferral Crediting Options once per calendar month beginning with the second calendar month that deferrals are first placed in their account. Any amounts added to or subtracted from a Participant's Account on any given day will be converted to hypothetical share equivalents ("Hypothetical Shares") based on the daily closing price on said date ("Share Price") for any given Deferral Crediting Option. For example, a deferral credited to a Participant's Account on January 3 will use the daily closing price for January 3 for each Deferral Crediting Option affected. As a result, the accounts will always be at least one day behind. Hypothetical Shares will be carried to three (3) decimal places or to a thousandth of a share. Share Prices shall be carried in U. S. Dollars and to the cent or hundredth of a dollar. Initially, the Share Price will be the daily closing price for the similar investment choice in CVS Corporation Future Fund on which any given Deferral Crediting Option is based. 5.06 Hypothetical Gains or Losses. Any hypothetical dividends, capital gains and any other income or share activity will be reflected in the Deferral Crediting Options. The timing of these will be the same as for the funds on which each Deferral Crediting Option is based. The gain or loss on Participant Accounts will be calculated each business day. The Share Price shall determine each Deferral Crediting Option's hypothetical value, based on the number of shares within the Account for any given Deferral Crediting Option. Account balances that are given to Participants on a given day will be based on the closing price of the previous business day. 11 ARTICLE VI DISTRIBUTION OF ACCOUNT 6.01 Normal Distributions. A Participant has two choices for Normal Distributions. These are Retirement and Specific Future Year. One of these must be chosen at the time of the Deferred Compensation Election. Participants may chose different options with each Deferred Compensation Election. (a) Retirement Participants can elect to receive distribution of their deferral account beginning the first business day of January following, or coincident with, their Retirement Date. (1) Interim Distribution Participants can elect to receive an Interim Distribution from their Account. This option is only available if the Retirement option is selected by the Participant. This Interim Distribution can be equal to 50% or 100% of the original annual deferral amount, or the Account balance if less, for any given Deferred Compensation Election. The Interim Distribution will be paid as of the first business day in January of the "Interim Distribution Year" selected by the Participant. The "Interim Distribution Year" can be as early as the third year the Deferred Compensation Election is in effect or as late as the tenth year the Deferred Compensation Election is in effect. If retirement occurs before the Interim Distribution is made, the Participant will only receive the retirement benefits. (b) Specific Future Year Participants can elect to receive distribution of their deferral account starting in a future year of their choice. The Specific Future Year must be at least five (5) Plan Years after the Deferred Compensation Election has been in effect, unless the Participant has attained age 55 or older in the year in which the Deferred Compensation Election is effective, then it must be a minimum period of one plan year. The Melville Deferred Compensation Plan provides for a minimum of three (3) years, and that provision will be maintained for accounts merged into this Plan. The Specific Future Year may not be later than the Plan Year in which the Participant attains age 71. Participants may change their elections under Section 6.01 or Section 6.02 at any time by duly completing, executing, and filing with the Plan Committee a new election on an appropriate form designated by the Plan Committee; provided however, that for any such change of election to be effective, a full calendar year must pass between the calendar year during which the Participant duly makes the change of election and the calendar year during which the Participant duly makes the change of election and the calendar year during which any portion of the Participant's Deferral Account is first to become payable after taking the change of election into account. 12 6.02 Form of Payment. (a) Normal Distributions will be made in annual or quarterly installments for up to, and including, fifteen (15) years. Annual payments will be as of the first business day of January, payable within twenty (20) days. The initial installment of a quarterly payment stream will begin as of the first business day in January following the Participant's Retirement Date or of the specified year, payable within twenty (20) days. Subsequent quarterly payments will be as of the first business day of each quarter, payable within twenty (20) days. Each annual or quarterly installment will be equal to a fraction of the Account balance as of the date the installment is paid. The numerator of the fraction being "1" and the denominator being the number of payments remaining in the payment schedule. For example, the respective fractions for a five (5) year annual installment schedule are 1/5 for the first installment; 1/4 for the second; 1/3 for the third; 1/2 for the fourth; and 1/1 (or the balance) for the fifth and final installment. (b) Normal Distributions will occur when and how a Participant elects to receive payment at the time of his or her Deferral Election. (c) In the calendar year prior to the year in which Normal Distribution of a Participant's Account is scheduled to begin (but no less than one year prior to the distribution date in any event), a Participant may request a change in form of payment which may be approved or disapproved by the Plan Committee in its sole discretion. 6.03 Disability Distributions. If a Participant becomes totally and permanently disabled while actively employed at the Company under the definition of Disability Retirement in CVS Corporation Future Fund, the Participant will receive the balance of their Account in five (5) annual installments with the first payment to be made within ninety (90) days following the date of disability. Subsequent annual payments will be paid as of the first business day in January. Participants may petition the Plan Committee for a shorter distribution schedule based upon hardship, which may be granted at the sole discretion of the Plan Committee. 6.04 Distributions in the Event of Death. In the event of a Participant's death while actively employed by the Company, the Participant's Beneficiary will receive the balance of the Account paid out in five (5) annual installments with the first payment to be made within ninety (90) days following the date of death. Subsequent annual payments will be paid as of the first business day in January. The Participant's Beneficiary may petition the Plan Committee for a shorter distribution schedule based upon hardship, which may be granted at the sole discretion of the Plan Committee. 6.05 Distributions for Termination Other Than Retirement, Death or Disability. In the event a Participant terminates from the Company for any reason other than 13 retirement, death, or disability, they will receive their Account in a lump sum payment within ninety (90) days of the date of termination of employment. 6.06 Account Valuation Upon a Distribution. Before a distribution pursuant to this Article, the balance of a Participant's Account shall be determined as of the business day of payment based on the Share Price in effect for that business day. 6.07 Designation of Beneficiary. Each Participant shall have the right to designate a beneficiary to receive payment of their Account in the event of their death. A beneficiary designation shall be made by executing and filing the beneficiary designation form prescribed by the Plan Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. If no such designation is on file with the Plan Committee at the time of the death of the Participant, or such designation is not effective for any reason as determined by the Plan Committee, then the beneficiary to receive such benefit shall be the Participant's surviving spouse, if any, or if none, the Participant's estate. 6.08 Unclaimed Benefits. If the Plan Committee is unable to locate a Participant or Beneficiary to whom a benefit is payable, such benefit may be forfeited to the Company upon the Plan Committee's determination. Notwithstanding the foregoing, if subsequent to any such forfeiture the Participant or Beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be restored to the Plan and paid by the Company, with interim interest credited as if the account were maintained in the plan. 6.09 Hardship Withdrawals. A Participant may apply in writing to the Plan Committee for, and the Plan Committee may grant, a hardship withdrawal of all or any part of a Participant's Account if the Plan Committee, in its sole discretion, determines that the Participant has incurred a severe financial hardship. The Plan Committee shall determine whether an event qualifies as a hardship within this Section, in its sole and absolute discretion. The amount that may be withdrawn shall be limited to the amount reasonably necessary to relieve the hardship or financial emergency upon which the request is based, plus the federal and state taxes due on the withdrawal, as determined by the Plan Committee. The Plan Committee may require a Participant who requests a hardship withdrawal to submit such evidence as the Plan Committee, in its sole discretion, deems necessary or appropriate to substantiate the circumstances upon which the request is based. Notwithstanding anything in the Plan to the contrary, if a Participant: (1) receives a withdrawal of deferred cash contributions on account of hardship from 14 any plan which is maintained by the Company and which meets the requirements of Section 401(k) of the Internal Revenue Code (or successor thereto) and (2) is precluded from making contributions to such 401(k) plan for at least 12 months after receipt of the hardship withdrawal, no amounts shall be deferred under this Plan under any Deferred Compensation Elections with respect to Base Salary or Annual Cash Incentive Compensation until such time as the Participant is again permitted to contribute to such 401(k) plan. Any Base Salary or Annual Cash Incentive Compensation payment which would have been deferred pursuant to a Deferred Compensation Election but for the application of this section shall be paid to the Participant as if he or she had not entered into the Deferred Compensation Election. 6.10 Other Withdrawals. At any time, a Participant may request that ninety percent (90%) of all, or a designated portion of, their account balance be paid to them. The Plan Committee in its sole discretion may approve or disapprove such a request. If it approves the request and a Participant receives a payment under this Section, the Participant shall: (a) permanently forfeit the remaining ten percent (10%) of all, or a designated portion of, the account balance paid to them; and (b) lose the right to defer into the Plan for twelve full calendar months following the date which a distribution is made pursuant to this Section. 6.11 Balances Transferred from the Melville Deferred Compensation Plan. Balances transferred to this Plan shall be subject to the provisions of this Article, with the following exceptions. (a) The Interim Distribution option will not be available. (b) A Specific Future Year must be at least three (3) Plan Years after the Deferred Compensation Election rather than at least five (5) Plan Years after the Deferred Compensation Election. 15 ARTICLE VII ADMINISTRATION 7.01 Plan Committee. The Plan shall be administered by a Plan Committee appointed by the Compensation Committee. The Plan Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Plan Committee may delegate to others certain aspects of the management and operations of the Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals, provided that such delegation is in writing. The Plan Committee shall be a "named fiduciary" as that term is defined in Section 402(a)(2) of ERISA. 7.02 General Powers of Administration. The Plan Committee shall have all powers necessary or appropriate to enable it to carry out its administrative duties. Not in limitation, but in application of the foregoing, the Plan Committee shall have the duty and power to interpret the Plan and determine all questions that may arise hereunder as to the status and rights of Employees, Participants, Beneficiaries, and any other person. The Plan Committee may exercise the powers hereby granted in its sole and absolute discretion. No member of the Plan Committee shall be personally liable for any actions taken by the Plan Committee unless the member's action involves willful misconduct. 7.03 Costs of Administration. The costs of administering the Plan shall be borne by the Company unless and until the Participant receives written notice of the imposition of such administrative costs, with such costs to begin with the next Plan Year and none may be assessed retroactively for prior Plan Years. Such costs shall be charged against the Participant's Account and shall be uniform or proportional for all Plan Participants. Such costs shall not exceed the standard rates for similarly designed nonqualified plans under administration by high quality third party administrators at the time such costs are initially imposed and thereafter. 7.04 Indemnification of Plan Committee. The Company shall indemnify the members of the Plan Committee against any and all claims, losses, damages, expenses, including attorney's fees, incurred by them, and any liability, including any amounts paid in settlement with their approval, arising from their action or failure to act, except when the same is judicially determined to be attributable to their gross negligence or willful misconduct. 16 ARTICLE VIII CLAIMS PROCEDURE 8.01 Claims. A person who believes that they are being denied a benefit to which they are entitled to under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Plan Committee, setting forth their claim. The request must be addressed to the Plan Committee at the Company's then principal place of business. 8.02 Claim Decision. Upon receipt of a claim, the Plan Committee shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Plan Committee may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Plan Committee shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth all of the following. (a) The specific reason or reasons for such denial. (b) The specific reference to pertinent provisions of the Plan on which such denial is based. (c) A description of any additional material or information necessary for the Claimant to perfect their claim and an explanation why such material or such information is necessary. (d) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review. (e) The time limits for requesting a review under this Section. 8.03 Request for Review. With sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Company review the determination of the Plan Committee. Such request must be addressed to the Secretary of the Company, at its then principal place of business. The Claimant or their duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Company. If the Claimant does not request a review of the Plan Committee's determination by the Company within such sixty (60) day period, he shall be barred and estopped from challenging the Plan Committee's determination. 8.04 Review of Decision. Within sixty (60) days after the Secretary's receipt of a request for review, he will review the Plan Committee's determination. After considering all materials presented by the Claimant, the Secretary will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be 17 extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 18 ARTICLE IX MISCELLANEOUS 9.01 Not Contract of Employment. The adoption and maintenance of the Plan shall not be deemed to be a contract between the Company and any person and shall not be consideration for the employment of any person. Nothing herein contained shall be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time nor shall the Plan be deemed to give the Company the right to require any person to remain in the employ of the Company or to restrict any person's right to terminate their employment at any time. 9.02 Non-Assignability of Benefits. No Participant, Beneficiary or distributee of benefits under the Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder, which are expressly declared to be unassignable and non-transferable. Any such attempted assignment or transfer shall be void. No amount payable hereunder shall, prior to actual payment thereof, be subject to seizure by any creditor of any such Participant, Beneficiary or other distributee for the payment of any debt judgment or other obligation, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of such Participant, Beneficiary or other distributee hereunder. 9.03 Withholding. All deferrals and payments provided for hereunder shall be subject to applicable withholding and other deductions as shall be required of the Company under any applicable local, state or federal law. 9.04 Amendment and Termination. The Compensation Committee may from time to time, in its discretion, amend, in whole or in part, any or all of the provisions of the Plan; provided, however, that no amendment may be made that would impair the rights of a Participant with respect to amounts already allocated to their Account. The Compensation Committee may terminate the Plan at any time. In the event that the Plan is terminated, the balance in a Participant's Account shall be paid to such Participant or Beneficiary in a single cash lump sum, in full satisfaction of all such Participant's or Beneficiary's benefits hereunder. Any such amendment to or termination of the Plan shall be in writing and signed by a member of the Compensation Committee. 9.05 No Trust Created. Nothing contained in this Plan, and no action taken pursuant to its provisions by the Company or any person, shall create, nor be construed to create, a trust of any kind or a fiduciary relationship between the Company and the Participant, Beneficiary, or any other person. 19 9.06 Unsecured General Creditor Status of Employee. The payments to the Participant, Beneficiary or any other distributee hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Company. No person shall have nor acquire any interest in any such assets by virtue of the provisions of this Plan. The Company's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Participant, Beneficiary or other distributee acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company. No such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Company. In the event that, in its discretion, the Company purchases an insurance policy, or policies, insuring the life of the Employee, or any other property, to allow the Company to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Participant, Beneficiary nor other distributee shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Company shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for a Participant, Beneficiary or other distributee or held as collateral security for any obligation of the Company hereunder. An Employee's participation in the underwriting or other steps necessary to acquire such policy or policies may be required by the Company and, if required, shall not be a suggestion of any beneficial interest in such policy or policies to a Participant. 9.07 Severability. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. 9.08 Governing Laws. All provisions of the Plan shall be construed in accordance with the laws of Rhode Island, except to the extent preempted by federal law. 9.09 Binding Effect. This Plan shall be binding on each Participant and their heirs and legal representatives and on the Company and its successors and assigns. 9.10 Entire Agreement. This document and any amendments contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. 20 IN WITNESS WHEREOF, the Company has caused this Plan to be properly executed on the first day of April, 1997. CVS CORPORATION (Corporate Seal) By: /s/ Charles C. Conaway --------------------------------- Its: Executive Vice President and CFO --------------------------------- Attested to: By: /s/ Zenon P. Lankowsky ------------------------------ Its: Secretary 21 EX-10.2 4 MATERIAL CONTRACTS CVS CORPORATION - -------------------------------------------------------------------------------- Partnership Equity Program - -------------------------------------------------------------------------------- THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 CVS CORPORATION - -------------------------------------------------------------------------------- Partnership Equity Program - --------------------------------------------------------------------------------
Page ---- 1. Purpose ........................................................................................1 2. Status as Subplan Implemented Under the Omnibus Plan.............................................1 3. Eligibility......................................................................................1 4. Awards Under the Program.........................................................................1 5. Election to Participate and Invest in Program; Purchased Shares..................................2 6. Matching Restricted Stock Units; Certain Terms Applicable to Stock and Matching Restricted Stock Units...........................................................4 7. Options..........................................................................................5 8. Forfeiture and Acceleration Upon Termination or Change in Control................................6 9. General Provisions...............................................................................8 10. Effective Date and Termination of Program........................................................9
CVS CORPORATION - -------------------------------------------------------------------------------- Partnership Equity Program - -------------------------------------------------------------------------------- 1. Purpose. This Partnership Equity Program (the "Program") of CVS Corporation (the "Company") is implemented under the Company's Omnibus Stock Incentive Plan (the "Omnibus Plan") in order to promote a partnership and team environment among the officer group through a mutual commitment to ownership of a proprietary interest in the Company through investment in the Company's Common Stock, $.01 par value per share ("Stock"), in the form of restricted stock units, and acquisition of additional restricted stock units and options to purchase Stock subject to a requirement of long-term service to the Company, and otherwise to further the purposes of the Omnibus Plan. 2. Status as Subplan Implemented Under the Omnibus Plan. The Program has been adopted by the Compensation Committee, pursuant to its authorization under the Omnibus Plan, as a subplan implemented under the Omnibus Plan. All shares of Stock issued or delivered in settlement of Purchased Shares (as hereinafter defined) and Matching Restricted Stock Units (as hereinafter defined) under the Program or issued upon exercise of options granted under the Program shall be shares of Stock reserved and available under the Omnibus Plan. All of the terms and conditions of the Omnibus Plan are hereby incorporated by reference. Capitalized terms used in the Program but not defined herein shall have the same meanings as defined in the Omnibus Plan. If any provision of the Program is inconsistent with a provision of the Omnibus Plan, the provision of the Omnibus Plan shall govern. The foregoing notwithstanding, if at any time the authority of the Committee to grant awards under the Omnibus Plan is terminated, the Committee may specify that the Program shall continue in effect under a plan which is a successor to the Omnibus Plan and which authorizes the Committee to grant awards of the type granted under the Program. In such case, Purchased Shares and Matching Restricted Stock Units subsequently sold or awarded and options subsequently granted shall be deemed to be awards under such successor plan, and, with respect to such subsequent awards, all references in this Program to the Omnibus Plan shall be deemed to refer instead to such successor plan. 3. Eligibility. Those officers and other key employees of the Company and its majority owned subsidiaries named on Exhibit A hereto (filed in confidence with the Committee's minutes) shall be eligible to participate in the Program for the initial 1997 offering. In addition, the Committee may, in its discretion, specify additional officers and other key employees who may become participants in the Program, together with the terms of participation to the extent not already specified in the Program or the Omnibus Plan, by attaching one or more additional exhibits hereto. 4. Awards Under the Program. An "Award" is a "Stock-Based Award," as defined in Section 9 of the Omnibus Plan, which consists of the following three components: (i) "Purchased Shares" shall be either Stock Units (as hereinafter defined) credited to a designated subaccount, or actual shares of Stock held in a designated subaccount, under the Participant's Purchased Share Account established under Section 5(b), representing the Participant's investment under the Program. (ii) "Matching Restricted Stock Units" shall be forfeitable Stock Units credited to the Participant's Matching Account as a bonus. (iii) An "Option" shall be an option to purchase Stock granted to the Participant in connection with his or her investment in Purchased Shares. Actual shares offered and sold as "Purchased Shares" and "Stock Units" are authorized by Section 9 of the Omnibus Plan. Each Stock Unit represents a right to receive, at the time of settlement specified in the Program, one share of Stock. In addition, during the period each Stock Unit is outstanding (i.e., prior to settlement or forfeiture), the Participant is entitled to crediting of dividend equivalents as specified in Section 6(b) in respect of each Stock Unit. Stock Units will include fractional stock units calculated to not less than three decimal places. An Option is a non-qualified stock option granted under Section 6 of the Omnibus Plan. The foregoing notwithstanding, if a Participant deposits previously acquired shares into his or her Purchased Share Account, such shares shall not be deemed an issuance of shares under the Omnibus Plan and shall not count against the number of shares reserved for issuance under the Omnibus Plan. 5. Election to Participate and Invest in Program; Purchased Shares. (a) Offering Periods and Elections. The initial period during which eligible persons may elect to participate and invest (the "1997 Offering Period") under the Program will close on February 18, 1997. The closing date of any other offering period under the Program will be specified by the Committee. Before a closing date, each person eligible to elect to participate in that offering period shall be notified by the Committee of the terms of the Program, including the amount such person is permitted to invest toward Purchased Shares, the permitted ways to make the investment, the date (the "Purchase Date") on which the price of Purchased Shares (the "Purchase Price") will be determined, and the offering period closing date, and shall be provided with an election form by which such person may elect (i) the amount to be invested in Purchased Shares and (ii) the manner in which the amount to be invested in Purchased Shares will be paid. Unless otherwise determined by the Committee, a Participant may invest in Purchased Shares in two ways: (i) on a pre-tax basis, by directing that (A) all or part of any cash incentive bonus that may become payable within six months after the end of the offering period be applied to the amount invested; or (B) all or part of an account balance under the Melville Deferred Compensation Plan (or a successor plan) be applied to the amount invested; or (ii) on an after-tax basis, by depositing shares of Stock previously acquired by the Participant into the Participant's Purchased Share Account promptly following the Purchase Date. If previously acquired shares are deposited in payment for Purchased Shares, each such deposited share shall be deemed to have a value equal to the Purchase Price of one Purchased Share. An eligible person who elects to participate shall be liable for full payment of the amount -2- elected to be invested so that, if the manner of payment elected by the Participant fails to provide full payment, the Participant will be notified and required to promptly pay any unpaid balance of the amount to be invested in cash or through such other means as may be agreed to by the Committee. (b) Acquisition of Purchased Shares. The Company shall establish and maintain for each Participant in each Offering Period a Purchased Share Account, which shall have the following subaccounts (as applicable): (i) A "Pre-Tax Subaccount" for crediting of Stock Units as a result of a pre-tax investment; or (ii) An "After-Tax Subaccount" for deposit and holding of actual shares as a result of an after-tax investment paid by the deposit of previously acquired shares. At the Purchase Date for an Offering Period, there shall be credited to the Participant's Pre-Tax Subaccount a number of Purchased Shares, in the form of Stock Units, equal to the pre-tax amount invested divided by the Purchase Price (rounded up to the next whole number of Stock Units), and there shall be deposited into the Participant's After-Tax Subaccount a number of Purchased Shares, in the form of actual shares of Stock, equal to the after-tax amount invested divided by the Purchase Price (rounded up to the next whole number of shares). The After-Tax Subaccount shall be an account maintained by a broker-dealer, the Company's transfer agent, or such other party as may be designated by the Company for the benefit of the Participant (the "Custodian"). The foregoing notwithstanding, if a Participant has deposited cash to be used for the purchase of actual shares as Purchased Shares through open-market purchases, the number of such Participant's Purchased Shares for purposes of Sections 6(a) and 7(a) shall be deemed to be the number purchasable at the Purchase Price, rounded up to the next whole number of shares, even though the number of actual shares acquired by the Custodian for the Participant's After-Tax Account may differ. (c) Certain Terms of Pre-Tax and After-Tax Subaccounts. Stock Units credited as Purchased Shares to the Pre-Tax Subaccount shall be subject to the terms of Sections 6(b) (dividend equivalents), 6(c) (settlement), and 6(d) (optional deferral). If so permitted by the Custodian, dividends and distributions on Purchased Shares in the After-Tax Subaccount shall be automatically reinvested in additional shares, which then shall be subject to the same terms and conditions applicable to Purchased Shares. If such dividend reinvestment is not so permitted, the Committee shall determine whether and how dividends and distributions on Purchased Shares in the After-Tax Subaccount shall be held or invested under such Subaccount. The Participant shall execute any document required by the Company and such Custodian in order to give effect to the terms of the Program. (d) Restrictions on Withdrawals and Dispositions of Purchased Shares. Purchased Shares in the form of Stock Units credited to the Participant's Pre-Tax Subaccount may not be transferred, withdrawn, or otherwise disposed of prior to the settlement of such Stock Units (generally not earlier than the fifth anniversary of the Purchase Date), and shall be settled at the time and in the manner specified in Section 6(c) (subject to Section 8(b)). Purchased Shares in the form of actual shares deposited in the Participant's After-Tax Subaccount are subject to no -3- restriction on transfer, withdrawal, or other dispositions, except that any such disposition prior to the settlement of Matching Restricted Stock Units relating to such Purchased Shares will result in the forfeiture of Matching Restricted Stock Units and Options as specified in Section 8(e). Purchased Shares in the form of actual shares will be settled by means of the lapse of this risk of forfeiture of related Matching Restricted Stock Units and Options. Each Participant for whom an After-Tax Subaccount is established shall authorize and direct the Custodian to inform the Company of any transaction affecting the Purchased Shares or other event under such Subaccount prior to the settlement of the Matching Restricted Stock Units to which such Purchased Shares relate. 6. Matching Restricted Stock Units; Certain Terms Applicable to Stock Units and Matching Restricted Stock Units. (a) Grant of Matching Restricted Stock Units. Each Participant shall be granted, as of the Purchase Date, a number of Matching Restricted Stock Units equal to the number of Purchased Shares the Participant has invested in at that date (subject to adjustment). The Company shall establish and maintain for each Participant in each Offering Period a Matching Account to which Matching Restricted Stock Units shall be credited under this Section 6. (b) Dividend Equivalents. A Participant shall be entitled to receive dividend equivalents in respect of Stock Units, including both Stock Units credited to a Pre-Tax Subaccount and Matching Restricted Stock Units credited to a Matching Account, as follows: (i) Dividends Other Than Stock Dividends. If the Company declares and pays any dividend or distribution on Stock in the form of cash or any other property other than Stock, the record date of which is prior to the settlement of Stock Units and/or Matching Restricted Stock Units, the Company shall credit, as of the payment date of such dividend or distribution, a number of additional Stock Units to the Participant's Pre-Tax Subaccount and the number of additional Matching Restricted Stock Units to the Participant's Matching Account determined by multiplying (A) the amount of cash actually paid plus the fair market value at such payment date of any such property actually paid as a dividend or distribution per share of Stock times (B) the number of Stock Units and Matching Restricted Stock Units credited to the respective account at the record date and dividing the product by (C) the Fair Market Value per share of Stock on the dividend or distribution payment date. (ii) Stock Dividends and Stock Splits. If the Company declares and pays a dividend or distribution in the form of Stock payable on Stock, or their occurs a forward stock split of the Stock, the record date of which is prior to the settlement of Stock Units and/or Matching Restricted Stock Units, the Company shall credit, as of the payment date of such dividend, distribution, or split, a number of additional Stock Units to the Participant's Pre-Tax Subaccount and the number of additional Matching Restricted Stock Units to the Participant's Matching Account equal to the number of shares of Stock paid as a dividend or distribution per share of Stock or distributed as a result of the split per share of Stock multiplied by the number of Stock Units and Matching Restricted Stock Units credited to the respective account at the record date. -4- (iii) Other Terms Applicable to Stock Units and Matching Restricted Stock Units Resulting from Dividends or Splits. Additional Stock Units or Matching Restricted Stock Units credited under this Section 6(b) will be subject to the same terms, including the risk of forfeiture in the case of Matching Restricted Stock Units, as the Stock Units or Matching Restricted Stock Units in respect of which they were credited. No such additional Matching Restricted Stock Units will be credited to a Participant in respect of Matching Restricted Stock Units forfeited under Section 8 on or before the payment date for the dividend, distribution, or split. A Participant shall not be entitled to receive actual dividends in respect of Stock Units or Matching Restricted Stock Units prior to the issuance of Stock in settlement thereof. (c) Settlement. Stock Units, and Matching Restricted Stock Units not previously forfeited under Section 8(c), shall be settled on the fifth anniversary of the Purchase Date; provided, however, that the Stock Units, and Matching Restricted Stock Units not previously forfeited, shall be settled on an accelerated basis as set forth in Section 8(c), and the Committee may, in other circumstances in its discretion, accelerate such settlement; and provided further, that the settlement of Stock Units and Matching Restricted Stock Units may be deferred by the prior election of the Participant as permitted under Section 6(d). Such settlement shall be effected by issuance and delivery, as promptly as practicable on or after the settlement date, of one share of Stock for each Stock Unit and each Matching Restricted Stock Unit being settled. The Committee may, in its discretion, make delivery of shares hereunder by depositing such shares into an account maintained by or for the Participant (or of which the Participant is a joint owner, with the consent of the Participant), including an After-Tax Subaccount established under the Program or another account established in connection with a plan or arrangement providing for investment in Stock and under which the Participant's rights are similar in nature to those under a stock brokerage account. If the Committee determines to settle Stock Units and Matching Restricted Stock Units by making a deposit of shares into such an account, the Company may settle any fractional Unit by means of such deposit if practicable under the terms of such account. In other circumstances or if so determined by the Committee, the Company may instead pay cash in lieu of delivery of a fractional share, on such basis as the Committee may determine. In no event will the Company in fact issue fractional shares. Upon such settlement, all obligations of the Company in respect of such Stock Units and Matching Restricted Stock Units shall be terminated, and the shares so distributed shall not be subject to any risk of forfeiture or restriction on transferability imposed under the Program. (d) Optional Deferral of Settlement of Stock Units. A Participant may defer settlement of Stock Units and/or Matching Restricted Stock Units if approved by the Committee and on such terms as may be specified by the Committee. 7. Options. (a) Grant of Options; Exercise Price. Each Participant shall be granted, as of the Purchase Date, an Option to purchase a number of shares equal to the whole number that is ten times the number of Purchased Shares the Participant has invested in at that date (subject to adjustment). The exercise price per share of the Option will equal the Purchase Price of the Purchased Shares (subject to adjustment). -5- (b) Exercisability. A Participant's Option may be exercised only to the extent it has become exercisable. The Option (to the extent not previously expired) shall become exercisable for one-third of the underlying shares on each of the third, fourth, and fifth anniversaries of the Purchase Date, provided, however, that the Option (to the extent not previously expired) shall become exercisable on an accelerated basis as set forth in Section 8(d), and the Committee may, in other circumstances in its discretion, accelerate the exercisability of the Option. The Option may be exercised only to purchase whole shares; no fractional shares will be issued upon exercise of the Option. (c) Expiration. A Participant's Option, to the extent that it has not been earlier exercised, shall expire the day before the tenth anniversary of the date as of which the Option was granted (the "Scheduled Expiration Date"), provided, however, that if the Participant has a Termination of Employment prior to the Scheduled Expiration Date, the Option shall expire at the time specified in Section 8(d). (d) Manner of Exercise. Options may be exercised in whole or in part, from time to time, all subject to the limitations on exercise set forth in this Section 7. Exercise shall be accomplished in accordance with Section 6 of the Omnibus Plan. At the time of exercise, the exercise price of the number of shares as to which the Option is being exercised shall be tendered to the Company. The exercise price of such Option shares shall be paid in cash or by check or, subject to Section 9(f), by surrender to the Company of shares of the Company's Stock (valued at their Fair Market Value on the date of exercise) other than shares acquired from the Company by exercise of an option during the preceding six months, or by a combination of cash, check, and surrender of such shares. For this purpose, the Participant may direct that Purchased Shares, including Stock Units, and Matching Restricted Stock Units shall be deemed to be tendered in payment of the exercise price. In such case, an equivalent number of shares acquired upon such exercise shall remain subject to the terms and conditions applicable to the Purchased Shares or Matching Restricted Stock Units deemed to have been tendered, and such tender shall not be deemed to be a disposition of such Purchased Shares or Matching Restricted Stock Units for purposes of the Program. In addition to the method of exercise and payment set forth in this Section 7(d), the Option may be exercised and payment to the Company made in accordance with any other procedures made available from time to time by the Committee. 8. Forfeiture and Acceleration Upon Termination or Change in Control. (a) Definition of Terms Relating to Termination and Change in Control. For purposes of the Program, terms relating to termination and change in control of the Company shall be defined for a given Participant as follows: (i) The terms "Cause," "Change in Control," "Constructive Termination," "Disability," "Normal Retirement," and "Approved Early Retirement" shall have the meanings defined in the Participant's employment agreement or, if none, change in control agreement with the Company, as then in effect. (ii) The term "Termination of Employment" means a termination of the Participant's employment with the Company or a subsidiary after which he or she is not continuing as an employee of the Company or any subsidiary. -6- (b) Purchased Shares. In the event of a Participant's Termination of Employment for any reason and in the event of a Change in Control, all of the Participant's outstanding Purchased Shares will be settled in accordance with Sections 5(d) and 6(c) as promptly as practicable following such event, except as such settlement of Stock Units credited to the Participant's Pre-Tax Subaccount may be deferred by the prior election of the Participant as permitted under Section 6(d). Purchased Shares are not forfeitable in any circumstance. (c) Matching Restricted Stock Units. In the event of a Participant's Termination of Employment due to death, Disability, Normal Retirement, Approved Early Retirement, or by the Company but not for Cause, and in the event of a Change in Control, all of the Participant's outstanding Matching Restricted Stock Units will be settled in accordance with Section 6(c) as promptly as practicable following such Termination, except as such settlement may be deferred by the prior election of the Participant as permitted under Section 6(d). In the event of a Participant's voluntary Termination of Employment or Termination of Employment by the Company for Cause, all of the Participant's outstanding Matching Restricted Stock Units will be immediately forfeited. (d) Options. In the event of a Participant's Termination of Employment due to death, Disability, Normal Retirement, or Approved Early Retirement, or by the Company but not for Cause, and in the event of a Change in Control, all of the Participant's outstanding Options that are not then exercisable will become immediately exercisable. In addition, in the event of such Termination of Employment the Participant's Options shall expire as follows: (i) In the event of a Participant's Termination of Employment due to death or Disability, the Participant's Options will expire at the earlier of the first anniversary of such Termination or the Scheduled Expiration Date. (ii) In the event of a Participant's Termination of Employment due to Normal Retirement, Approved Early Retirement, or by the Company prior to a Change in Control and not for Cause, the Participant's Options will expire at the earlier of the third anniversary of such Termination or the Scheduled Expiration Date. (iii) In the event of a Participant's voluntary Termination of Employment prior to a Change in Control, the Participant's Options that are not then exercisable will be forfeited and expire immediately, and the Participant's Options that are exercisable at the time of such Termination will expire at the earlier of 90 days following such Termination or the Scheduled Expiration Date. (iv) In the event of a Participant's voluntary Termination of Employment after a Change in Control, Constructive Termination after a Change in Control, or Termination of Employment by the Company after a Change in Control and not for Cause, the Participant's Options will expire at the earlier of the Scheduled Expiration Date or the first anniversary of Participant's death. (v) In the event of a Participant's Termination of Employment by the Company for Cause, all of the Participant's Options will be forfeited and expire immediately. -7- The foregoing notwithstanding, if any provision of an employment agreement between the Company and the Participant in effect, or policy, including an income continuation policy, applicable to the Participant and in effect, at the time of a Change in Control or Termination of Employment would provide the Participant with more favorable treatment with respect to Matching Restricted Stock Units or Options than under this Section 8, such provision shall govern. (e) Dispositions of Purchased Shares from After-Tax Account. Except as provided in Section 7(d), Purchased Shares in the form of Stock Units credited to a Pre-Tax Subaccount are non-transferable. Purchased Shares deposited in an After-Tax Subaccount are not restricted as to transferability, but, except as provided in Section 7(d), if a Participant sells, withdraws, or otherwise disposes of Purchased Shares from his or her After-Tax Subaccount prior to the settlement of Matching Restricted Stock Units relating to such Purchased Shares, the Participant will immediately forfeit the number of Matching Restricted Stock Units (including additional Matching Restricted Stock Units acquired as a result of deemed dividend reinvestment on previously credited Matching Restricted Stock Units) that were credited with respect to the Purchased Shares disposed of, and the Participant will immediately forfeit all or a portion of the Option granted in respect of the Purchased Shares disposed of determined as follows: Such Participant shall forfeit the Option to purchase ten shares for each Purchased Share so disposed of, except that only the portion of the Option that is not yet exercisable shall be forfeited and, therefore, the maximum number of underlying shares as to which the Option is forfeitable under this Section 8(e) shall not exceed the number of underlying shares as to which the Option had not yet become exercisable. 9. General Provisions. (a) Adjustments. Purchased Shares (including both actual shares and Stock Units), Matching Restricted Stock Units, Options, and optionally deferred Stock Units, and terms relating thereto, shall be subject to adjustment in accordance with Section 10 of the Omnibus Plan. (b) Nontransferability. Stock Units, Matching Restricted Stock Units, Options, and all rights relating thereto shall not be transferable or assignable by a Participant, other than by will or the laws of descent and distribution (or pursuant to a beneficiary designation if and to the extent authorized by the Committee), and shall not be pledged, hypothecated, or otherwise encumbered in any way or subject to execution, attachment, or similar process. (c) Certain Other Terms. Terms relating to compliance with legal obligations, withholding of shares issuable in settlement of Stock Units and Matching Restricted Stock Units, and upon exercise of Options, to pay tax withholding obligations, and terms applicable to Awards under the Program are set forth in Section 11 of the Omnibus Plan. (d) No Partnership Rights or Rights to Participate. A Participant's participation in the Program, investment in Purchased Shares, and grant of an Award under the Program confers no rights as a partner of a partnership. No Participant or employee will have any claim to participate in any offering period under the Program, except as selected by the Committee for a given offering period, and the Company will have no obligation to continue the Program for any offering period after the initial 1997 Offering Period. -8- (e) Changes to the Program. The Committee may amend, alter, suspend, discontinue, or terminate the Program without the consent of Participants; provided, however, that, without the consent of an affected Participant, no such action shall materially and adversely affect the rights of such Participant with respect to an outstanding Award. (f) Limitation on Repurchase Obligation. The Company will not be obligated to repurchase shares from a Participant to pay the exercise price or withholding taxes relating to an exercise of an Option or settlement of Stock Units or Matching Restricted Stock Units if the Committee determines, prior to completion of any such repurchase, that such repurchase will not be permitted, in an individual case or generally; provided, however, that the Committee will have no power to prevent such a repurchase in a given case if such power would require the Committee to separately approve a repurchase from a Participant then subject to Section 16 of the Exchange Act in respect of the Company in order for such repurchase to be exempt under Rule 16b-3(e). (g) Agreements and Other Documents. The Committee shall specify agreements or other documents to evidence rights and obligations under the Program. A form of agreement that may be used to evidence rights and obligations relating to Purchased Shares, Stock Units, and Matching Restricted Stock Units is attached hereto as Exhibit B, and a form of agreement that may be used to evidence rights and obligations relating to Options is attached hereto as Exhibit C. (h) Governing Law. The validity, construction, and effect of the Program and agreements and related documents hereunder will be determined in accordance with the Delaware General Corporation Law, to the extent applicable, and other laws (including those governing contracts) of the State of Rhode Island, without giving effect to principles of conflicts of laws, and applicable federal law. 10. Effective Date and Termination of Program. The Program shall become effective on January 1, 1997. Unless earlier terminated under Section 9(e), the Program shall terminate at such time as no Stock Units or Options previously acquired or granted under the Program remain outstanding. -9- EX-15.1 5 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION Part II Exhibit 15.1 ================================================================================ Letter re: Unaudited Interim Financial Information CVS CorSporation Woonsocket, Rhode Island Board of Directors: Re: Registration Statements Numbers 333-49407, 33-40251, 333-34927, 333-28043, 33-17181, 2-97913, 2-77397 and 2-53766 on Form S-8 and 333-52055 on Form S-3 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 29, 1998 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, /s/ KPMG Peat Marwick LLP - ------------------------- KPMG PEAT MARWICK LLP Providence, Rhode Island August 7, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated condensed balance sheets, and the consolidated condensed statements of operations found in the Company's Form 10-Q for the six months ended June 27, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 DEC-31-1997 JUN-27-1998 1.00 62,000 0 539,400 40,100 2,938,000 3,848,900 1,859,200 687,300 6,062,600 2,742,000 289,800 0 281,700 4,000 2,571,100 6,062,600 7,357,400 7,357,400 5,330,000 5,330,000 1,713,900 900 30,100 283,400 135,200 148,200 0 0 0 148,200 0.37 0.36
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 DEC-31-1997 MAR-28-1998 1.00 135,600 0 503,600 39,300 3,147,900 4,051,700 1,764,000 661,300 6,176,200 2,965,200 290,000 0 284,300 2,000 2,456,700 6,176,200 3,601,500 3,601,500 2,594,600 2,594,600 768,000 100 11,200 227,700 95,600 132,000 0 0 0 132,000 0.34 0.33
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1997 1.00 192,500 0 491,600 39,200 2,882,400 3,892,100 1,696,100 623,900 5,978,900 2,910,600 290,300 0 284,600 2,000 2,328,000 5,978,900 13,749,600 13,749,600 10,031,300 10,031,300 3,456,900 15,300 44,100 217,300 140,800 76,500 17,500 (17,100) 0 76,900 0.17 0.16
EX-27.4 9 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 DEC-31-1996 SEP-27-1997 1.00 191,700 0 402,100 52,200 2,657,600 3,532,900 1,734,300 671,600 5,690,600 2,673,900 331,100 0 285,800 1,900 2,190,700 5,690,600 10,133,300 10,133,300 7,386,800 7,386,800 2,708,100 15,300 38,300 100 47,200 (47,100) 17,500 (17,100) 0 (46,700) (0.15) (0.16)
EX-27.5 10 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 DEC-31-1996 JUN-28-1997 1.00 109,000 4,100 439,300 33,700 2,498,300 3,400,400 1,711,500 640,700 5,654,000 2,430,900 609,800 0 286,300 1,900 2,091,700 5,654,000 6,804,600 6,804,600 4,963,700 4,963,700 1,956,000 7,600 29,100 (144,200) (14,900) (129,300) 17,500 (17,100) 0 (128,900) (0.37) (0.37)
EX-27.6 11 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 DEC-31-1996 MAR-29-1997 1.00 395,200 181,600 437,200 44,500 2,515,500 3,683,000 1,676,200 601,200 5,967,300 2,020,600 1,195,800 0 296,300 1,900 2,218,200 5,967,300 3,397,800 3,397,800 2,430,000 2,430,000 791,900 7,600 12,900 163,100 71,000 92,100 100 0 0 92,200 0.24 0.24
EX-27.7 12 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 DEC-31-1995 DEC-31-1996 1.00 506,800 181,400 411,800 36,900 2,465,900 3,732,600 1,626,600 564,000 6,014,900 2,192,300 1,204,800 0 298,600 1,800 2,113,400 6,014,900 11,831,600 11,831,600 8,530,700 8,530,700 2,709,000 1,600 69,900 643,400 271,000 372,400 (164,200) 0 0 208,200 0.53 0.52
EX-27.8 13 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 DEC-31-1995 SEP-28-1996 1.00 122,400 44,400 530,400 55,100 2,741,400 3,665,000 1,961,300 645,500 6,011,000 2,195,800 921,100 1,300 298,600 171,900 2,501,000 6,011,000 8,506,700 8,506,700 6,110,700 6,110,700 1,980,000 1,600 55,000 463,100 195,100 268,000 (161,000) 0 0 107,000 0.26 0.26
EX-27.9 14 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 DEC-31-1995 JUN-29-1996 1.00 120,900 101,800 384,200 53,500 2,590,700 3,457,600 1,964,600 666,300 5,892,000 1,971,000 1,092,300 1,300 298,600 171,900 2,438,400 5,892,000 5,653,400 5,653,400 4,043,100 4,043,100 1,298,900 0 38,800 349,200 147,400 201,800 (179,800) 0 0 22,000 0.04 0.04
EX-27.10 15 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 3-MOS DEC-31-1996 DEC-31-1995 MAR-30-1996 1.00 127,200 208,900 521,300 54,600 2,998,400 4,083,200 2,309,000 791,300 6,647,300 2,677,600 1,018,000 1,300 298,600 171,000 2,450,500 6,647,300 2,765,600 2,765,600 1,969,400 1,969,400 639,057 0 16,900 140,200 60,500 79,700 (26,300) 0 0 53,400 0.14 0.13
EX-27.11 16 RESTATED FINANCIAL DATA SCHEDULE
5 The financial data reported in this schedule has been restated to reflect the merger of CVS Corporation and Arbor Drugs, Inc. which was accounted for as a pooling of interests. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 DEC-31-1994 DEC-31-1995 1.00 180,900 176,900 524,800 59,300 2,923,200 4,058,800 2,290,400 778,300 6,614,400 2,629,200 1,056,300 1,300 334,900 170,900 2,060,300 6,614,400 10,513,100 10,513,100 7,553,112 7,553,112 2,688,200 14,600 114,000 157,800 74,300 83,500 (630,600) 0 0 (547,100) (1.56) (1.55)
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