<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(Amendment No. 1)
------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1011
CVS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(FORMERLY MELVILLE CORPORATION)
------------------------
<TABLE>
<S> <C>
DELAWARE 05-0494040
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE CVS DRIVE 02895
WOONSOCKET, RHODE ISLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (401) 765-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
Common Stock, par value $.01 per share New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value of the registrant's voting stock* held by
non-affiliates** of the registrant (without admitting that any person whose
shares are not included in such calculation is an affiliate) on March 1, 1997
was $4,944,270,225, based on the last sale price as reported by the New York
Stock Exchange.
As of March 1, 1997, the registrant had 107,158,665 shares of Common Stock
outstanding.
- ---------------
* Does not include 5,526,677 outstanding shares of Series One ESOP Convertible
Preference Stock ("ESOP Preference Stock"). As of March 1, 1997, each share
of ESOP Preference Stock is entitled to approximately 1.2 vote(s) per share
on all matters submitted to a vote of the holders of Common Stock.
** Only stock held by directors and officers is excluded.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the year ended December 31, 1996: Part
II, Items 6, 7 and 8; and Part IV, Item 14.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
General
CVS Corporation, a Delaware corporation ("CVS" or the "Company"), is a
leader in the chain drug industry with over $5.5 billion in revenue in 1996. As
of December 31, 1996, the Company operated 1,408 stores, in 14 states and the
District of Columbia, most of which have pharmacies. In addition to prescription
drugs and services, CVS stores offer a broad selection of health and beauty
aids, greeting cards, photo processing services, cosmetics, convenience foods,
private label and seasonal items. In 1996, pharmacy sales increased 18.4% to
$2.4 billion, representing 43.9% of total sales for the year, while
higher-margin front store sales increased 9.3% to $3.1 billion, representing
56.1% of total sales for the year. CVS pharmacies fill an average of about 1,200
prescriptions a week, which is significantly higher than the average community
pharmacy. Total sales of $573 per square foot place CVS among the top performers
in the chain drug industry.
The Company's principal executive offices are located at One CVS Drive,
Woonsocket, Rhode Island 02895.
Strategic Restructuring Plan
In October 1995, the Board of Directors of CVS approved a comprehensive
restructuring plan that was the product of a strategic review initiated in 1994.
The restructuring plan included, among other things, (i) the continued operation
of CVS (which includes CVS and, initially, the Linens 'n Things and Bob's
divisions), (ii) the disposition of the Marshalls, Kay-Bee Toys, Wilsons and
This End Up divisions (collectively, the "Dispositions"), (iii) the spin-off of
Footstar, Inc. ("Footstar"), which includes the Meldisco, Footaction and Thom
McAn divisions, and (iv) the elimination of significant corporate overhead
costs. Subsequently, in May 1996, the Board of Directors approved further
refinements to the restructuring plan, which included, among other things, a
formal plan to separate the Linens 'n Things and Bob's divisions from CVS. The
Dispositions were completed during 1995 and 1996. The Company completed the
spin-off of Footstar in October 1996 and, in December 1996, completed the
initial public offering of 67.5% of the shares of common stock of Linens 'n
Things, Inc. See Note 2 of Notes to Consolidated Financial Statements for
further information about the Company's restructuring program.
The Company's stock began trading on the New York Stock Exchange under the
symbol "CVS" on October 16, 1996 and, on November 20, 1996, Melville's corporate
name was officially changed to CVS Corporation. As used in this Form 10-K,
unless the context indicates otherwise, "CVS" or the "Company" shall mean and
include Melville with respect to periods prior to November 20, 1996.
Agreement to Acquire Revco D.S., Inc.
On February 6, 1997, CVS signed a definitive merger agreement to acquire
Revco D.S., Inc. ("Revco") in a stock-for-stock merger valued at approximately
$2.8 billion. CVS will also assume approximately $900 million of existing Revco
debt as part of this transaction.
The combination of CVS and Revco, which has been approved by the Boards of
Directors of both companies, will bring together two of the leading companies in
the chain-drug industry to create the nation's largest chain drugstore company
based on store count, with approximately 4,000 locations in 24 states and the
District of Columbia. The combination will bring the combined company into
high-growth, contiguous markets in the Northeast, Mid-Atlantic, Southeast and
Midwest regions; and the combined enterprise is expected to rank second in
annual retail drugstore revenues in 1997.
Under the terms of the merger agreement, CVS will combine with Revco in an
exchange of stock that is expected to qualify for treatment as a pooling of
interests transaction, tax free to Revco shareholders. If the merger is
completed, for each share of Revco common stock held, Revco shareholders will
receive the sum of (i) 0.4692 shares of CVS common stock and (ii) the number of
shares of CVS common stock equal to the quotient obtained by dividing $20 by the
average closing price of CVS common stock during ten trading days
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<PAGE> 3
randomly selected out of the twenty trading days ending on the fifth trading day
preceding the closing date (collectively, the "Exchange Ratio"), provided that,
under no circumstances will the Exchange Ratio exceed 1.0097 or be less than
0.8837.
The transaction is subject to approval by the shareholders of both
companies, expiration of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain
other customary closing conditions. If all the closing conditions have been met,
it is expected that the transaction will be completed by mid-year 1997.
Products and Operations
A key focus of the Company's business is its pharmacy operations. The
Company believes that its pharmacy operations will continue to represent a
significant portion of its sales and profits due to (i) the demographic trend
toward an aging population, (ii) the continued development of new pharmaceutical
products and services, (iii) the Company's ability to attract and maintain third
party provider business and (iv) the continued shift toward payment for
prescriptions by third party providers. The Company also offers a broad
selection of general merchandise, presented in a well-organized fashion, in
stores that are designed to be warm, inviting and easy to shop. Major year-round
product lines include health and beauty aids, cosmetics, greeting cards, photo
processing services, books and magazines, convenience foods and household items.
The Company also features private label and seasonal items. The Company offers
over 1,100 products under the CVS brand private label, accounting for 11% of the
Company's front store sales. By providing high quality at an excellent price,
sales of CVS brand name products have grown at an annual rate of over 15%.
The Company's merchandising effort is driven by a highly successful
category management approach, which affords the ability to refine and tailor
store merchandise selection market-by-market, based on local demographics. In
addition, the Company emphasizes the creation of key destination categories,
such as greeting cards, film and photofinishing, beauty and cosmetics,
convenience foods, private label and seasonal merchandise. These product areas
are managed so as to differentiate CVS in the marketplace and to take advantage
of the potential each destination category has to offer. To further support
growth in existing stores, the Company has in place an active remodel and
remerchandise program, which seeks to remodel 20% of the Company's existing
stores each year and to remerchandise another 20% each year. The Company has
also extended store hours in many locations, and, at the end of 1996, operated
approximately 100 24-hour stores.
The Company centrally purchases most of its merchandise, including
prescription drugs, directly from manufacturers, allowing it to take advantage
of the promotional and volume discount programs that certain manufacturers offer
to retailers. During 1996, approximately 84% of the merchandise purchased by the
Company was received at one of the Company's four distribution centers for
redistribution to its stores. The balance of store merchandise is shipped
directly to CVS stores from manufacturers and distributors at prices negotiated
at the corporate level. The Company's largest supplier accounted for
approximately 6.5% of total merchandise purchased in 1996. The Company believes
that the loss of any one supplier or group of suppliers under common control
would not have a material effect on its business.
In the Company's pharmacy business, its "RX2000" computer system enables
CVS pharmacists to manage their prescription filling duties more efficiently,
giving them more time to spend with customers. The RX2000 system, which includes
one of the largest data warehouses in the country, facilitates the management of
third party healthcare plans and provides a warehouse of pharmacy data that can
be analyzed by both CVS and its managed care customers for a variety of
healthcare- and business-related applications. In addition, the Company is
currently implementing an Interactive Voice Response system that enables
customers to place refill orders by telephone.
In the front store business, the Company has developed an advanced "Retail
Data Warehouse" that enables a quick analysis of point-of-sale ("POS") data on a
store-by-store basis to develop targeted marketing and merchandising strategies.
The Company has also implemented a "Field Management System" that uses POS data
to identify areas to improve operational execution on a store-by-store basis. In
addition, the Company is in the process of reengineering its entire warehouse
and merchandising network, in order to enable the more efficient and effective
control of merchandise flow to CVS stores.
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<PAGE> 4
The Company's business normally generates higher revenues during the
holiday season in its fourth fiscal quarter. In each of the fiscal years ended
1996 and 1995, the fourth quarter accounted for approximately 28.0% of the
Company's net sales.
CVS Stores
At December 31, 1996, the Company operated 1,408 stores, in 14 states and
the District of Columbia. CVS stores are considered "destination" stores and are
located primarily in "strip" shopping centers or are freestanding units. CVS
stores generally range in size from approximately 8,000 to 10,000 square feet,
with an average store size of approximately 9,000 square feet. The prototype new
store size is 75' x 135' (or 10,125 square feet), with growth programs directed
toward freestanding locations at traffic controlled intersections. The following
is a breakdown by state of the locations of the 1,408 Company operated stores at
the end of 1996:
<TABLE>
<S> <C>
Connecticut.................... 113
Delaware....................... 3
District of Columbia........... 48
Georgia........................ 11
Maine.......................... 20
Maryland....................... 116
Massachusetts.................. 308
New Hampshire.................. 29
New Jersey..................... 140
New York....................... 228
Pennsylvania................... 206
Rhode Island................... 48
Vermont........................ 2
Virginia....................... 130
West Virginia.................. 6
</TABLE>
The Company believes that significant opportunities exist to increase its
presence in many existing markets, as well as to enter new geographic areas. The
Company intends to build on its existing base of stores in the Northeast and
Mid-Atlantic. The Company also intends to expand its base by entering
fast-growing markets in contiguous states through acquisition opportunities as
well as new store openings, through both self-development and landlord-built
projects.
During 1996, the Company opened 98 new stores, including 23 relocations.
During 1997, the Company expects to open approximately 150 new stores, including
approximately 50 relocations. This planned expansion would contribute an
additional 5% in square footage, as most new stores will be approximately 10,000
square feet in size. Many new stores have drive-through pharmacies. Sites are
selected based on convenience, with an emphasis on free-standing locations.
The addition of new stores has played, and will continue to play, a major
role in the Company's continued growth. As new stores have been opened, the
Company has maintained its objective of securing strong positions in each market
that its stores serve. This provides the Company several important advantages,
including an ability to save on advertising and distribution costs. It is also
an important consideration for managed care providers, who want to provide their
members with convenient access to pharmacy services.
The Company's efforts to open new stores are complemented by an active
store relocation and renovation program that is aimed at making CVS' store base
as productive as possible. The Company aggressively pursues opportunities to
relocate select strip center stores to freestanding locations. Plans for 1997
include approximately 50 relocations. Freestanding locations require properties
of approximately 1 1/4 acres to support parking for 40-60 cars. Site selection
is also an important aspect of the Company's relocation program. As stores are
relocated to free-standing or more convenient locations, the Company has often
been able to achieve a 20-25% increase in sales.
If the proposed merger with Revco is completed, the transaction is expected
to create the nation's largest chain drugstore company based on store count,
with approximately 4,000 locations in 24 states and the District of Columbia.
The combination will bring the combined company into high-growth, contiguous
markets in the Northeast, Mid-Atlantic, Southeast and Midwest regions; and the
combined enterprise is expected to rank second in annual retail drugstore
revenues in 1997.
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The following table sets forth, for the periods indicated below, certain
information concerning CVS store growth:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER
31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Stores open, beginning of period.............................. 1,284 1,328 1,366
Stores added.................................................. 63 73 75
Stores closed................................................. 19 35 33
Stores open, end of period.................................... 1,328 1,366 1,408
</TABLE>
Pharmacy Sales and Managed Care
In 1996, pharmacy sales increased 18.4% to $2.4 billion, representing 43.9%
of total sales for the year. Pharmacy sales in 1995 and 1994 were $2.0 billion
and $1.7 billion, representing 42.0% and 40.4% of total sales for such years.
CVS pharmacies fill an average of about 1,200 prescriptions per store per week,
which is significantly higher than the average community pharmacy. Growth in
pharmacy sales is primarily driven by (i) the Company's ability to succeed in
the rapidly-growing managed care arena, (ii) the purchase of prescription files
from independent pharmacies and (iii) favorable trends, including an aging
American population, greater demand for retail formats that provide easy access
and convenience, the continued discovery and development of new drug therapies
and a need for cost-effective healthcare solutions.
During fiscal 1996, 81.8% of pharmacy sales were attributable to payments
by third party providers under prescription drug plans, as compared to 76.1% in
1995 and 69.1% in 1994. The shift toward payment for prescriptions by third
party providers is likely to continue, as consumers move from fee-for-service
indemnity plans to managed care plans with preferred providers. In a typical
third party payment plan, the Company has a contract with a third party payor,
such as an insurance company, a prescription benefit management company, a
governmental agency, a private employer, a health maintenance organization or
other managed care provider, which agrees to pay for all or a portion of a
customer's eligible prescription purchases in exchange for reduced prescription
rates. Although third party payment plans provide a high volume of prescription
drug sales, such sales typically generate lower gross margins than other
prescription drug sales due to the cost containment efforts of these large third
party payors and the increasing competition among pharmacies for this business.
CVS' experience in providing solutions to managed care providers, and its
existing store base which affords easy access and convenience to consumers, are
factors that should contribute to the Company's continued ability to attract and
maintain third party business. In addition, the Company's RX2000 pharmacy
computer system facilitates the management of third party healthcare plans and
enables CVS to provide managed care providers with a level of information
unmatched by competitors. By analyzing this data, CVS and its managed care
partners are able to evaluate treatment outcomes with an eye toward improving
care and containing costs. The Company's emphasis on customer service extends
from the expert advice and service that individual customers receive from CVS
pharmacists into the managed care portion of the Company's business, where
Managed Care Service Teams are responsible for insuring the high level of
service that CVS' managed care partners receive. During 1996, the top 5
providers accounted for approximately 41% of pharmacy sales. Any significant
loss of third party provider business could have a material adverse affect on
the Company's business and results of operations.
The Company's pharmacy business also continues to benefit from an
"independent file buy" program, in which CVS purchases prescription files from
one or more independent pharmacies. During 1996, CVS purchased 114 prescription
files, containing an average weekly prescription count of approximately 400,
from independent pharmacies, and the Company plans to purchase a similar number
of prescription files during 1997. The Company believes that independent file
buys are productive investments. In many cases, the independent pharmacist will
move to CVS, thereby providing continuity in the pharmacist-patient
relationship.
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Pharmacare
CVS is committed to being part of an integrated healthcare approach that
brings together industry participants such as physicians, pharmaceutical
companies, managed care providers and pharmacies in order to provide patients
with the best possible care at the lowest cost. The Company's efforts to date
have primarily concentrated on two main areas: (i) the operation and expansion
of Pharmacare, the Company's prescription benefit management subsidiary and (ii)
the creation of strategic alliances with healthcare partners.
Pharmacare, founded in 1994, provides managed care providers a full range
of prescription benefit management services including plan design and
administration, formulary management, claims processing and generic
substitution, with a focus on providing integrated solutions to the delivery of
healthcare. In the two and a half years since it was established, Pharmacare has
grown considerably and, at the end of 1996, managed healthcare services for more
than one million people through a preferred national pharmacy network of
approximately 37,500 pharmacies.
One of the features that sets Pharmacare apart from other prescription
benefit management providers is its proprietary Clinical Information Management
System ("CIMS"). CIMS enables CVS pharmacists to work more efficiently with
physicians by facilitating communication and information-sharing, with the
objective of improving patient care and reducing costs. More than 10,000
physicians are currently using CIMS. In addition, Pharmacare plays an increasing
role in healthcare management through integrated partnerships with several large
managed care providers.
CVS is also pursuing strategic alliances with healthcare partners to
develop products and services that will create new opportunities for revenue and
profit growth. In December 1995, CVS announced its first such alliance, a joint
venture with Pfizer Health Solutions, Inc., a subsidiary of Pfizer, Inc., called
HealthCare Market Research ("HCMR"). This partnership, will draw upon Pfizer's
expertise in research and disease management and the wealth of information
residing in CVS' pharmacy data warehouse. HCMR plans to develop
information-based products to help managed care organizations and employers
achieve better health outcomes and cost efficiencies. One goal is to provide
clients with economic comparisons of various pharmaceutical care programs to
help them select care management strategies for particular patients and disease
types, with the objective of improving treatment and managing costs.
Information Systems
CVS has made significant investments in information systems to enable the
Company to deliver an exceptional level of customer service, while lowering
costs and increasing operating efficiency. The Company's client-server based
system permits rapid and flexible system development to meet changing business
needs, enabling the integration of CVS systems with those of other healthcare
providers, including many of the Company's managed care customers. With a
scaleable technical architecture, CVS can efficiently expand its network and add
stores.
In the Company's pharmacy business, the RX2000 computer system enables CVS
pharmacists to manage their prescription filling duties more efficiently, giving
them more time to spend with customers. The RX2000 system facilitates the
management of third party healthcare plans and provides a warehouse of pharmacy
data that can be analyzed by both CVS and its managed care customers for a
variety of healthcare-and business-related applications. In addition, the
Company is currently implementing an Interactive Voice Response system that
enables customers to place refill orders by telephone.
In the front store business, the Company has developed an advanced "Retail
Data Warehouse" that enables a quick analysis of point-of-sale ("POS") data on a
store-by-store basis to develop targeted marketing and merchandising strategies.
The Company has also implemented a "Field Management System" that uses POS data
to identify areas to improve operational execution on a store-by-store basis. In
addition, the Company is in the process of a major supply chain initiative to
reengineer its entire warehouse and merchandising network, which is intended to
enable the more efficient and effective control of merchandise flow to CVS
stores.
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Customer Service
CVS strives to provide the highest levels of service to its customers and
partners. As a result, the Company devotes considerable time and attention to
people, systems and high service standards. The Company places an emphasis on
attracting friendly and helpful associates to work both in CVS stores and
throughout the CVS organization. The Company continuously provides training and
educational programs, and invests in the tools associates need to do their jobs
effectively. The Company measures results continuously, to identify and correct
any problems quickly. Each CVS store receives a formal customer service
evaluation twice per year, based on a mystery shopper program, customer letters
and calls, and market research. In addition, feedback received through customer
letters and calls is provided on a more informal basis every month. CVS'
priority on customer service extends into the managed care portion of its
business as well. In every market, a Managed Care Service Team is responsible
for insuring that managed care partners are receiving high levels of service.
These teams have the ability to bring in additional corporate support as
necessary to meet our partners' needs. CVS pharmacists consistently rank at the
top of the industry on measurements of trust, relationship-building and
accessibility. This high level of service and expertise has played a key role in
enabling growth in pharmacy operations year after year.
Regulation
The Company's pharmacies and pharmacists are required to be licensed by the
appropriate state boards of pharmacy. The Company's pharmacies and its
distribution centers are also registered with the Federal Drug Enforcement
Agency. By virtue of these licensing and registration requirements, the Company
is required to comply with various statutes, rules and regulations, a violation
of which could result in a suspension or revocation of such licenses or
registrations. Under the Omnibus Budget Reconciliation Act of 1990, the
Company's pharmacists are required to offer counseling, without charge, to
customers covered by Medicare about medication, dosage, delivery system,
potential side effects, and other information deemed significant by such
pharmacists. The Company's pharmacists in fact routinely offer such counseling
to consumers.
Competition
The retail drugstore business is highly competitive. The Company believes
that it competes principally on the basis of: (i) store location and
convenience, (ii) customer service and satisfaction, (iii) product selection and
variety and (iv) price. The Company experiences active competition not only from
independent and other chain drugstores, but also from health maintenance
organizations, hospitals, mail order organizations, supermarkets, discount
drugstores and discount general merchandisers. Among major drug chains, some
competitors have greater financial resources than the Company and have used such
resources, in some instances, to improve their competitive position through
modernized store systems, aggressive remodeling, new store openings and
acquisitions. The deep discount drug segment has experienced significant growth
over the past several years as drug chains, food, discount and specialty
retailers have entered the business. Major retail companies now operate deep
discount drugstores in the most competitive retailing markets. "Combo" stores,
which consist of grocery, drugstore and several other operations under the same
roof, have also experienced significant growth over the past several years as
consumers have become more attracted to one-stop shopping. Retail mass
merchandisers with prescription departments have also grown in popularity. The
Company believes, based on publicly available information, that, as of December
31, 1996, it ranked 5th on a store-count basis and 6th on an annual sales-volume
basis among chain drugstores.
ITEM 2. DESCRIPTION OF PROPERTY
Most CVS stores are occupied pursuant to long term leases that vary as to
rental amounts and payments, expiration dates, renewal options and other rental
provisions. The Company does not deem any individual store lease to be
significant in relation to its overall business. For information as to the
amount of the Company's rental obligations for retail store leases, see Note 12
of Notes to Consolidated Financial Statements.
The Company owns its corporate headquarters located in Woonsocket, Rhode
Island, which contains approximately 272,000 square feet. The Company also owns
and operates four distribution centers, located in
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Woonsocket, Rhode Island, North Smithfield, Rhode Island, Lumberton, New Jersey
and Fredericksburg Virginia, which contain an aggregate of approximately
2,445,000 square feet. In addition, the Company owns a store support building
located in Woonsocket, Rhode Island which contains approximately 114,000 square
feet, and an office building located in Woonsocket, Rhode Island which contains
approximately 33,000 square feet. The Company also leases approximately 41,000
square feet in an office building in Lincoln, Rhode Island and three "satellite"
store support buildings which contain an aggregate of approximately 120,000
square feet.
In addition, in connection with certain dispositions completed between 1991
and 1996, CVS continues to guaranty the lease obligations for approximately
2,600 former stores. The Company is indemnified for these obligations by the
respective purchasers. See Note 13 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries are involved in the
assertion of claims and in litigation incidental to the normal course of
business. In the opinion of management, no existing claims or litigation will
have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 19, 1996, at a special meeting of the stockholders of Melville
Corporation, the Melville stockholders approved a proposal (the "Proposal") to
incorporate a new holding company in Delaware resulting in Melville stockholders
owning shares of such new Delaware holding company named "CVS Corporation" and,
in connection therewith, to effect the amendments to the holding company's
charter and bylaws, all as more fully described in the Proxy Statement of the
predecessor corporation, Melville Corporation, on Schedule 14A dated October 7,
1996 filed with the Securities Exchange Commission. The Proposal was approved by
a vote of 85,999,993 shares in favor of the Proposal, 1,163,842 shares opposed
to the Proposal (none of which were broker non-votes deemed to be votes against
the Proposal) and 302,969 shares abstaining from voting.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is included as an unnumbered item in Part I of this Report.
<TABLE>
<CAPTION>
DATE
DATE FIRST
APPOINTED APPOINTED
TO OFFICER
PRESENT OF
NAME/OFFICE AGE OFFICE COMPANY
- --------------------------------------------------------------- --- --------- ---------
<S> <C> <C> <C>
Charles C. Conaway............................................. 36 07/10/96 07/10/96
Chief Financial Officer and Executive Vice President
Stanley P. Goldstein........................................... 62 01/01/87 04/13/71
Chairman of the Board and Chief Executive Officer
Aldwin Jolly................................................... 57 10/09/96 10/09/96
Vice President
Larry J. Merlo................................................. 41 10/09/96 10/09/96
Vice President
Daniel C. Nelson............................................... 47 10/09/96 10/09/96
Vice President
Thomas M. Ryan................................................. 44 10/09/96 01/01/94
Vice Chairman and Chief Operating Officer
Larry Solberg.................................................. 49 10/09/96 10/09/96
Vice President
</TABLE>
In each case the term of office extends to the date of the board of
directors meeting following the next annual meeting of shareholders of the
Company. In addition to the office(s) which they hold in the Company as shown
above, each of the individuals listed (with the exception of Mr. Goldstein)
holds various offices in certain CVS subsidiaries. Previous positions and
responsibilities held by each of the above officers with the
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<PAGE> 9
Company and for each of the above officers who have not held the same office(s)
with the same responsibilities for more than the past five years, are indicated
below:
Charles C. Conaway, Executive Vice President and Chief Financial Officer of
CVS since July 1996; Executive Vice President and Chief Financial Officer of CVS
Pharmacy, Inc. since February 1995; from September 1992 to February 1995, Senior
Vice President -- Pharmacy of the CVS Pharmacy, Inc.; from August 1989 to
September 1992, Executive Vice President, Chief Operating Officer and a director
of Reliable Drug Stores, Inc.; director of Linens 'n Things, Inc.
Stanley P. Goldstein, Chairman of the Board and Chief Executive Officer of
CVS since January 1987; director of NYNEX Corporation, Linens 'n Things, Inc.
and Footstar.
Aldwin Jolly, Vice President of CVS since October 1996; Senior Vice
President -- Human Resources of CVS Pharmacy, Inc. since April 1992; from
September 1986 to April 1992, President of Corporate Investments, International.
Larry J. Merlo, Vice President of CVS since October 1996; Senior Vice
President -- Stores of CVS Pharmacy, Inc. since January 1994; from March 1993 to
December 1993, Area Vice President of CVS Pharmacy, Inc.; from March 1991 to
March 1993, Area Vice President of Peoples Drug Stores, Inc.
Daniel C. Nelson, Vice President of CVS since October 1996; Executive Vice
President -- Marketing of CVS Pharmacy, Inc. since September 1993; from June
1990 to September 1993, Senior Vice President of Dominicks Finer Foods, Inc.
Thomas M. Ryan, Vice Chairman and Chief Operating Officer of CVS since
October 1996; President and Chief Executive Officer of CVS Pharmacy, Inc. since
January 1994; from January 1990 to January 1994, Executive Vice
President -- Stores of CVS Pharmacy, Inc.; director of Citizens Bank.
Larry Solberg, Vice President of CVS since October 1996; Senior Vice
President -- Finance and Controller of CVS Pharmacy, Inc. since March 1996; Vice
President and Controller of CVS Pharmacy, Inc. from October 1994 to March 1996;
from September 1993 to October 1994, Senior Vice President of PIMMS Corp.; prior
to September 1993, various offices with National Car Rental Corp., most recently
as Executive Vice President and Chief Financial Officer.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The number of holders of the Company's Common Stock, based upon the number
of record holders, was approximately 5,700 as of December 31, 1996. The
Company's Common Stock is listed on the New York Stock Exchange ("NYSE"), under
the ticker symbol "CVS." The following table sets forth, for the calendar
quarters indicated, the reported high and low sale prices of CVS Common Stock as
reported on the NYSE Composite Transaction Tape, based on published financial
sources, and the cash dividends declared on the CVS Common Stock.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
HIGH LOW DECLARED
--- --- ---------
<S> <C> <C> <C>
1995
First Quarter.............................................. $37 1/2 $30 5/8 $0.38
Second Quarter............................................. $39 7/8 $33 5/8 $0.38
Third Quarter.............................................. $37 1/4 $32 3/4 $0.38
Fourth Quarter............................................. $37 1/8 $28 5/8 $0.38
1996
First Quarter.............................................. $36 3/8 $27 1/4 $0.11
Second Quarter............................................. $44 1/2 $35 1/4 $0.11
Third Quarter(1) $46 $36 5/8 $0.11
Fourth Quarter............................................. $44 3/4 $36 3/8 $0.11
</TABLE>
- ---------------
(1) On October 12, 1996, CVS completed the distribution of 100% of the common
stock of Footstar to CVS' stockholders. The CVS stock prices shown in the
table are actual CVS trading prices and do not reflect any adjustments for
the when-issued price of Footstar prior to October 16, 1996 (the date on
which Footstar common stock commenced trading regular way on the NYSE).
UNREGISTERED SALES OF SECURITIES
The Company did not sell any equity securities during the period covered by
this Annual Report on Form 10-K that were not registered under the Securities
Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1996 on page 53 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1996 on pages 28 through
33 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1996 on pages 34 through
52, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years and subsequent interim
period, no event occurred which would require disclosure under this item.
10
<PAGE> 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See "Executive Officers of the Registrant"
appearing in Part I above.
(b) Directors -- The following individuals currently serve as directors of
CVS. Mr. Jordan and Mr. Rosenthal are current directors
who are not standing for re-election at the next meeting
of stockholders of CVS. Each individual's age is indicated
in parentheses alongside such individual's name.
Allan J. Bloostein, (67), a director since 1989, is the President of Allan
J. Bloostein Associates, a consulting firm; retired Vice Chairman and director
of May Department Stores; director of Taubman Centers Inc.; trustee or director
of various Smith Barney investment portfolios.
W. Don Cornwell, (49), a director since 1994, is the Chairman of the Board
and Chief Executive Officer of Granite Broadcasting Corporation, a group
broadcasting company.
Thomas P. Gerrity, (55), a director since 1995, is the Dean of The Wharton
School of the University of Pennsylvania; director of Digital Equipment
Corporation, the Federal National Mortgage Association, Reliance Group Holdings,
Inc., Sun Company, Inc. and Union Carbide Corporation; trustee of the MAS Funds.
Stanley P. Goldstein, (62), a director since 1984, has been Chairman of the
Board and Chief Executive Officer since January 1987; director of NYNEX
Corporation, Linens 'n Things, Inc. and Footstar.
Michael H. Jordan, (60), a director since 1984, is the Chairman of the
Board and Chief Executive Officer of Westinghouse Electric Corporation; from
August 1992 to June 1993, Principal of Clayton, Dubilier & Rice, Inc., a private
investment firm; prior to August, 1992, Chairman and Chief Executive Officer of
PepsiCo International Food and Beverages; director of Aetna Life & Casualty
Company, Dell Computer Corporation, Nukote, Inc. and Rhone-Poulenc Rorer Inc.
William H. Joyce, (61), a director since 1994, is the Chairman of the Board
and Chief Executive Officer of Union Carbide Corporation, a leading producer of
chemicals and polymers; from January 1993 to January 1996, President, Chief
Operating Officer and director of Union Carbide Corporation; from December 1991
to January 1993, Executive Vice President of Union Carbide Corporation; director
of Reynolds Metals Company.
Terry R. Lautenbach, (58), a director since 1991, is a retired Senior Vice
President of IBM Corporation, a multinational advanced information technology
company; director of Air Products and Chemicals Inc., Varian Associates, Inc.
and Footstar; trustee of Loomis-Sayles Mutual Funds.
Terrence Murray, (57), a director since 1996, is the Chairman, President
and Chief Executive Officer of Fleet Financial Group; director of A.T. Cross
Company and Allmerica Financial Corporation.
Harvey Rosenthal, (54), a director since 1994; prior to October 1996,
President and Chief Operating Officer of Melville Corporation; prior to January,
1994, Vice President of CVS and President and Chief Executive Officer of CVS
Pharmacy, Inc.
Thomas M. Ryan, (44), a director since 1996; Vice Chairman and Chief
Operating Officer of CVS since October 1996; President and Chief Executive
Officer of CVS Pharmacy, Inc. since January 1994; from January 1990 to January
1994, Executive Vice President Stores of CVS Pharmacy, Inc.; director of
Citizen's Bank.
Ivan G. Seidenberg, (50), a director since 1993, is the Chairman of the
Board and Chief Executive Officer of NYNEX Corporation, a worldwide
communications company; from January 1995 to April 1995, President, Chief
Executive Officer and director of NYNEX Corporation; from February 1994 to
January 1995, President, Chief Operating Officer and Vice Chairman of NYNEX
Corporation; from April 1991 to
11
<PAGE> 12
February 1994, Vice Chairman, Telecommunications Group, NYNEX Corporation;
director of American Home Products Corporation, Viacom Inc. and Allied Signal
Inc.
Patricia Carry Stewart, (68), a director since 1989, is a retired Vice
President of The Edna McConnell Clark Foundation, a charitable foundation;
director of Bankers Trust New York Corporation.
M. Cabell Woodward, Jr., (68), a director since 1982, is a retired Vice
Chairman, Chief Financial Officer and director of ITT Corporation, a diversified
multinational corporation; director of The Black & Decker Corporation and
Footstar; trustee of a management investment company sponsored by PaineWebber.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes all compensation awarded to, earned by or
paid to the five named executive officers for all services rendered to CVS and
its subsidiaries for the periods indicated.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
AWARDS PAYOUTS
---------------------------- ------- ALL
ANNUAL COMPENSATION RESTRICTED SECURITIES LTIP OTHER
----------------------- STOCK AWARDS UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2)(3) OPTIONS(#)(2) ($)(4) ($)(5)
- --------------------------------- --------------- ----------- ------------ ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stanley P. Goldstein............. 1996 1,050,000 1,000,000 -- -- -- 20,040
Chairman of the Board, 1995 1,050,000 -- -- 519,690 -- 3,750
Chief Executive Officer and 1994 1,050,000 491,400 240,863 -- 109,549 4,350
Director of CVS
Thomas M. Ryan................... 1996 587,599 2,558,000 300,000 346,460 -- 9,167
Vice Chairman, Chief 1995 525,000 862,000 870,000 86,615 -- 10,580
Operating Officer and 1994 450,000 230,000 145,515 11,549 -- 7,914
Director of CVS; President and
Chief Executive Officer of CVS
Pharmacy, Inc.
Charles C. Conaway............... 1996 387,500 2,037,000 230,000 230,974 -- 9,167
Executive Vice President and
Chief Financial Officer of CVS;
Executive Vice President and
Chief Financial Officer of CVS
Pharmacy, Inc.
Daniel C. Nelson 1996 337,575 537,000 230,000 230,974 -- 8,375
Vice President of CVS;
Executive Vice
President -- Marketing of CVS
Pharmacy, Inc.
Larry J. Merlo................... 1996 266,250 358,000 153,000 86,615 -- 9,000
Vice President of CVS; Senior
Vice President -- Stores of
CVS Pharmacy, Inc.
</TABLE>
- ---------------
(1) Includes a deferred bonus in the amount of $1,500,000 payable to each of
Messrs. Ryan and Conaway in 1999 in recognition of their work in
successfully implementing CVS' restructuring.
(2) Options outstanding have been adjusted to account for the spin-off of
Footstar on October 12, 1996. Options granted in 1996 become exercisable as
follows: one-half of the grant becomes exercisable in three annual
installments beginning on the second anniversary of the grant date and the
remaining one-half of the grant becomes exercisable after seven years of
continued future employment, subject to accelerated vesting of 50% if the
trading value of CVS Common Stock reaches $43.2950 and the other 50% if the
trading value reaches $47.6245.
(3) Restricted stock granted in 1996 is forfeitable if the recipient ceases to
be employed by CVS during the three-year restriction period, subject to
accelerated vesting in certain events. All restricted stock disclosed in
this table and currently outstanding reflect awards of either (i)
performance-based restricted stock which is contingent upon meeting one year
performance objectives and subject to a three-year holding period from the
date of grant or (ii) restricted stock that vests over either a three or
four year period based on continuing employment. Based on the number of
shares of restricted stock earned at the end of a period, dividends are paid
at the same rate as paid to all shareholders from the date of the award. On
December 31, 1996, Mr. Goldstein had a right to receive, in the aggregate,
9,177 restricted shares having a
12
<PAGE> 13
market value on December 31, 1996 of $378,551. Mr. Ryan had a right to
receive, in the aggregate, 33,044 restricted shares having a market value on
December 31, 1996 of $1,363,065. Mr. Conaway had a right to receive, in the
aggregate, 17,960 restricted shares having a market value on December 31,
1996 of $740,850. Mr. Nelson had a right to receive, in the aggregate,
18,545 restricted shares having a market value on December 31, 1996 of
$764,981. Mr. Merlo had a right to receive, in the aggregate, 6,419
restricted shares having a market value on December 31, 1996 of $264,784.
(4) Represents performance shares granted for the 1992-1994 performance cycle
based on the market value on December 31, 1994 of $30.31. These units were
earned at the end of the performance cycle based on pre-established
financial performance objectives with respect to earnings per share, growth
and return on equity.
(5) For 1996, includes $3,000, $6,167, $6,167, $5,375 and $6,000 contributed
under CVS' 401(k) Profit Sharing Plan for Mr. Goldstein, Mr. Ryan, Mr.
Conaway, Mr. Nelson and Mr. Merlo, respectively; 56.127 ESOP shares based on
an assumed market value of $53.45 per share (total value of $3,000)
contributed under the CVS ESOP for each of the named executives; and $14,040
paid as premiums on life insurance on behalf of Mr. Goldstein.
Option Grants in Fiscal Year Ending December 31, 1996
The following table summarizes activity relating to stock options awarded
to the named executive officers in the last fiscal year.
<TABLE>
<CAPTION>
NO. OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS GRANTED EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME (#)(1) FISCAL YEAR(2) PRICE DATE VALUE(3)
- --------------------------------- --------------- --------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Stanley P. Goldstein............. 0 0.00% N/A N/A N/A
Thomas M. Ryan................... 346,460 31.25% $33.4445 5/14/2006 $3,073,100
Charles C. Conaway............... 230,974 20.83% $33.4445 5/14/2006 $2,048,739
Daniel C. Nelson................. 230,974 20.83% $33.4445 5/14/2006 $2,048,739
Larry J. Merlo................... 86,615 7.81% $33.4445 5/14/2006 $ 768,275
</TABLE>
- ---------------
(1) The number of shares granted and the exercise price per share has been
adjusted to account for the spin-off of Footstar on October 12, 1996. These
options become exercisable as follows: one-half of the grant becomes
exercisable in three annual installments beginning on the second anniversary
of the grant date and one-half of the grant becomes exercisable after seven
years of continued future employment, subject to accelerated vesting of 50%
if the trading value of the CVS Common Stock reaches $43.2950 and the other
50% if the trading value reaches $47.6245. The exercise prices are equal to
the fair market value of CVS Common Stock on the grant date.
(2) Based on options to purchase 1,108,673 shares granted to all employees
during 1996.
(3) The hypothetical present values on the grant date are calculated under the
modified Black Scholes Model, which is a mathematical formula used to value
options traded on stock exchanges. This formula considers a number of
factors in hypothesizing an option's present value. Factors used to value
options granted which expire 5/14/2006 include the stock's expected
volatility rate (20.7%), risk free rate of return (6.58%), projected
dividend yield (1.1%), projected time of exercise (7 years) and projected
risk of forfeiture rate for vesting period (5% per annum). There is no
assurance that the hypothetical present value of the stock options reflected
in this table will be realized.
13
<PAGE> 14
Aggregated Option Exercises in Fiscal Year Ending December 31, 1996 and
Year-end Option Values
The following table summarizes stock option exercise activity for the named
executive officers during the last fiscal year and the fiscal year-end values of
unexercised options.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#)(1) AT FISCAL YEAR-END($)(2)
SHARES --------------------- ------------------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------------------------- -------------- -------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Stanley P. Goldstein............ 30,000 $465,569 487,353/346,460 $3,157,567/$3,079,301
Thomas M. Ryan.................. 3,000 $ 40,691 155,444/317,589 $1,124,312/$2,541,442
Charles C. Conaway.............. 0 $ 0.00 81,995/196,329 $ 561,268/$1,557,446
Daniel C. Nelson................ 0 $ 0.00 86,614/196,329 $ 592,005/$1,557,446
Larry J. Merlo.................. 0 $ 0.00 34,473/ 64,962 $ 255,164/$ 507,060
</TABLE>
- ---------------
(1) Options outstanding have been adjusted to account for the spin-off of
Footstar on October 12, 1996.
(2) The value of unexercised in-the-money options at fiscal year-end assumes a
fair market value of CVS Common Stock of $41.25, the average of the high and
low sale prices of the CVS Common Stock as reported by the New York Stock
Exchange on December 31, 1996. The actual before-tax amount, if any,
realized upon the exercise of a stock option will depend upon the market
price of the CVS Common Stock at the time the stock option is exercised.
There is no assurance that the value of unexercised in-the-money stock
options reflected in this table will be realized.
Income Continuation Policy
In January 1987, the CVS Board of Directors adopted and in May 1988
amended, the Income Continuation Policy for Select Senior Executives of CVS (the
"Income Continuation Policy"), which provides that in the event of a change in
control, as defined in the Income Continuation Policy, and subsequent
termination of employment by CVS other than for cause, or by the executive with
good reason (as defined in the Income Continuation Policy), within 24 months of
a change in control, the Chief Executive Officer and other current named
executive officers in the Summary Compensation Table will be entitled to receive
from CVS a single sum payment equal to three times the sum of annual base pay
plus their full normal annual incentive compensation award immediately prior to
such termination of employment. In addition, upon such a termination of
employment, each covered executive will be entitled to remain a participant in
all employee welfare benefit plans maintained by CVS at the time of such
termination of employment for a period of 24 months after such termination of
employment (or if such participation is not possible under the terms of any such
plan, each such executive shall be provided with benefits which are comparable
to the coverage provided by such plan). The Income Continuation Policy also
provides that in the event of a change in control each covered executive shall
be fully vested in all shares previously awarded to the executive under CVS'
Omnibus Stock Incentive Plan and any successor plan thereto without regard to
any restrictions previously imposed under the terms of such plan and entitled to
exercise any stock options on CVS Common Stock (whether or not otherwise
exercisable). In addition, upon termination of employment each outstanding
option shall remain exercisable until the earlier of six months after such
termination, provided such exercise does not violate the terms of the plan under
which such option was granted, or the expiration of the option period specified
in such plan. The Income Continuation Policy also provides that if payments
under such policy or the Supplemental Executive Retirement Plan described below
are subject to the "golden parachute" excise tax under Section 4999 of the Code
(which deals with certain payments contingent on a change in control), CVS will
make an additional payment to the covered executive in respect of such tax.
Supplemental Executive Retirement Plan
CVS maintains a Supplemental Executive Retirement Plan for Select Senior
Management of CVS (the "Supplemental Retirement Plan"). The Supplemental
Retirement Plan is designed to increase the retirement
14
<PAGE> 15
benefits of selected executive employees. In connection with CVS' restructuring
during 1996, the Supplemental Retirement Plan was amended to create a new
benefit formula (the "New Benefit Formula"). Under the New Benefit Formula,
executives selected for participation (including Messrs. Ryan, Conaway, Nelson
and Merlo) will receive an annual benefit commencing on the later of age 55 or
retirement, equal to 1.6% of a three-year average of final compensation (as
defined) for each year of service (including credited years of service under the
Supplemental Retirement Plan prior to amendment) up to 30 years, or a maximum
benefit of 48% of final compensation, with no offset for any amounts provided by
CVS' qualified plans, social security or other retirement benefits. Except in
the event of a change in control (as defined in the plan) or as provided in the
employment agreements referred to below, no benefits are payable to an eligible
executive unless he or she terminates employment after attaining age 55 or after
five years of credited service under the plan. The following table shows the
approximate amounts of annual retirement income that would be payable under the
New Benefit Formula to executives covered by it based on various assumptions as
to compensation and years of service, assuming benefits are computed under a
straight life annuity formula and retirement after attaining age 55 or with five
years of service:
ESTIMATED ANNUAL RETIREMENT BENEFITS BASED ON SERVICE OF
<TABLE>
<CAPTION>
COMPENSATION 5 YEARS 10 YEARS 15 YEARS 20 YEARS 30 YEARS
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 600,000 $ 48,000 $ 96,000 $144,000 $192,000 $288,000
800,000 64,000 128,000 192,000 256,000 384,000
1,000,000 80,000 160,000 240,000 320,000 480,000
1,300,000 104,000 208,000 312,000 416,000 624,000
1,600,000 128,000 256,000 384,000 512,000 768,000
1,900,000 152,000 304,000 456,000 608,000 912,000
</TABLE>
Final compensation for purposes of the New Benefit Formula is the average
of the executive's three highest years of annual salary and bonus out of the
last ten years of service. For this purpose, salary and bonus are the amounts
shown in the Salary and Bonus column of the Summary Compensation Table. The
estimated credited years of benefit service for Messrs. Ryan, Conaway, Nelson
and Merlo as of December 31, 1996 were 21, 4, 3 and 18 years, respectively.
Enhanced benefits are payable in a lump sum upon termination of employment
following a change in control.
The benefit formula in place prior to amendment of the Supplemental
Retirement Plan (the "Prior Benefit Formula") continues to apply to Mr.
Goldstein and certain other executives who have terminated employment with a
vested benefit. The Prior Benefit Formula provides that executive officers with
at least 10 years of credited service will receive upon retirement at or after
age 60 an annual benefit equal to 50% of final compensation less any amounts
provided by other retirement programs of CVS or programs of other companies (but
without deduction for social security). In the case of retirement on or after
age 55 but before age 60, a reduced benefit is provided. Except in the event of
a change in control (as defined in the plan) or as provided in the employment
agreements referred to below, no benefits are payable to an eligible executive
who terminates employment prior to age 55 or prior to completing 10 years of
credited service.
Under the Prior Benefit Formula, Mr. Goldstein is currently entitled to
retire with an annual benefit of $768,000, computed under a straight life
annuity formula. Final compensation for purposes of the Prior Benefit Formula is
the executive's final year of salary plus targeted annual incentive bonus for
his or her final year. In the event of a change in control, benefits will be
payable under the Prior Benefit Formula upon subsequent termination of
employment on a lump sum basis.
Benefits under the New Benefit Formula and the Prior Benefit Formula are
generally payable in annual installments for the life of the executive, but
joint and survivor forms of payment of equivalent actuarial value may be
elected.
15
<PAGE> 16
CVS Employment Agreements
In December 1996, the CVS Board approved that CVS enter into employment
agreements (each referred to below as a "CVS Employment Agreement" and
collectively as the "CVS Employment Agreements") with Messrs. Ryan, Conaway,
Nelson, Merlo and one other executive officer relating to their employment with
CVS. CVS has entered into a CVS Employment Agreement with certain of these
officers and expects that the remaining unexecuted employment agreements will be
entered into within a reasonable period after the date of this Annual Report on
Form 10-K. The CVS Employment Agreements supersede the Income Continuation
Policy (referred to above) as it relates to such executives.
The period of employment under the CVS Employment Agreements extends
initially for three years, subject to automatic one-year extensions at the end
of the initial term unless either party gives notice of non-renewal at least 180
days prior to expiration of the term. The CVS Employment Agreements generally
provide for payment of an annual base salary, subject to review for increase at
the discretion of the Compensation Committee. Base salaries are currently
$725,000, $500,000, $450,000 and $350,000 for Messrs. Ryan, Conaway, Nelson and
Merlo, respectively. The CVS Employment Agreements also generally provide for
(i) continued payment of base salary, target cash bonuses, and other benefits
for 36 months in the case of Mr. Ryan and for 24 months in the case of other
named executive officers (or a lump sum equal to three times salary plus target
bonuses in the case of a change in control) in the event the executive's
employment is terminated by CVS without "cause" or voluntarily by the executive
due to a "constructive termination without cause"; (ii) non-competition for a
period of 18 months subsequent to a voluntary termination of employment if CVS
elects to continue paying 50% of the executive's base salary during such period;
(iii) other restrictive covenants including nondisclosure, non-solicitation of
employees and availability for litigation support; (iv) participation in certain
benefit plans and programs (including life insurance and medical benefits); (v)
annual and long term incentive compensation opportunities; and (vi) deferred
compensation arrangements. Mr. Ryan's CVS Employment Agreement provides that his
target annual incentive opportunity may not be less than 65% of his base salary,
and the CVS Employment Agreements for Messrs. Conaway, Nelson and Merlo provide
that their target annual incentive opportunities may not be less than 60%, 60%
and 50%, respectively, of their base salaries.
A "change in control" is defined in generally the same manner as under the
proposed 1997 Incentive Compensation Plan, as described below. "Constructive
termination without cause" is defined generally as demotion, reduction in
compensation, unapproved relocation in the case of Mr. Ryan (or, in the case of
other named executive officers, following a change in control), material breach
of the CVS Employment Agreement by CVS, or, in the case of Mr. Ryan, failure to
extend the term of the CVS Employment Agreement to his 60th birthday. "Cause" is
defined generally as a breach of the restrictive covenants, felony convictions,
or willful gross neglect or gross misconduct resulting in material harm to CVS.
If payments under the CVS Employment Agreements following a change in
control are subject to the "golden parachute" excise tax, CVS will make an
additional "gross-up" payment sufficient to ensure that the net after-tax amount
retained by the executive (taking into account all taxes, including those on the
gross-up payment) is the same as would have been the case had such excise tax
not applied. The CVS Employment Agreements obligate CVS to indemnify the
executives to the fullest extent permitted by law, including the advancement of
expenses, and provide that CVS generally will reimburse an executive for
expenses incurred in seeking enforcement of the CVS Employment Agreement if he
prevails or, after a change in control, if the executive's assertion of rights
is in good faith and not frivolous.
The CVS Employment Agreement with Mr. Ryan relates to his employment as
Vice Chairman and Chief Operating Officer of CVS, President and Chief Executive
Officer of CVS Pharmacy Inc., and his agreement to serve as a member of the CVS
Board of Directors of CVS. The CVS Employment Agreements with Messrs. Conaway,
Nelson and Merlo relate to their employment as executive officers of CVS.
Pursuant to the terms of his employment agreement with CVS, Mr. Harvey
Rosenthal (who is a former officer of CVS whose employment with CVS terminated
during 1996 and who is a current director of CVS who is not standing for
re-election at the next meeting of stockholders of the Company) will be paid his
base salary at the rate in effect on September 30, 1996 (the date of his
termination) for a period of two years, plus
16
<PAGE> 17
$800,000 to be paid in equal monthly installments over the severance period and
a lump sum amount of $323,995 which was paid in 1996. All restrictions on
restricted stock held by Mr. Rosenthal lapsed as of his date of termination. Mr.
Rosenthal's outstanding options will continue to vest during the severance
period in accordance with the options' original schedules and will remain
exercisable for six years following his termination.
Compensation of CVS Directors
Summarized below are each of the components of directors compensation in
effect for the fiscal year ended December 31, 1996.
Annual Retainer and Stock Grant. Each director who is not an employee of
CVS receives a retainer of $25,000 per year and a fee of $1,000 for each CVS
Board or committee meeting that he or she attends. In addition, each director
who is not an employee of CVS receives an annual retainer of $2,500 for each
committee he or she chairs. One-half of the annual retainer is paid in CVS
Common Stock. At a director's election, all retainers and meeting fees may be
paid in CVS Common Stock. In accordance with the 1996 Directors Stock Plan, each
non-employee director receives an annual grant of 347 shares of CVS Common
Stock, subject to proration for any partial year of service. Receipt of shares
may be electively deferred.
As of December 31, 1996, CVS' directors had deferred receipt of shares of
CVS Common Stock as follows: Mr. Bloostein, 3,558 shares; Mr. Cornwell, 1,026
shares; Mr. Gerrity, 183 shares; Mr. Jordan, 2,523 shares; Mr. Joyce, 1,393
shares, Mr. Lautenbach, 1,911 shares; Mr. Seidenberg, 1,185 shares; Ms. Stewart,
3,711 shares; and Mr. Woodward, 5,573 shares.
Directors Retirement Plan. The CVS Board of Directors determined to cease
further accruals under the Directors Retirement Plan and to permit each director
who is entitled to a benefit under the Directors Retirement Plan to elect to
receive the present value of such benefit in the form of shares of CVS Common
Stock. Each of CVS' entitled directors elected to do so.
Directors and Officers Liability Insurance. CVS has purchased directors
and officers liability insurance with a limit of $100,000,000 and pension trust
liability insurance with a limit of $50,000,000. This insurance was purchased in
layers from National Union Fire Insurance Company of Pittsburgh, Pennsylvania;
Federal Insurance Company of Warren, New Jersey; Royal Indemnity Company of
Charlotte, North Carolina; Columbia Casualty Insurance Company of Chicago,
Illinois; St. Paul Surplus Lines Company of St. Paul, Minnesota; and Reliance
Insurance Company of Philadelphia, Pennsylvania. The pension trust liability
insurance covers actions of directors and officers as well as other employees
with fiduciary responsibilities under ERISA. All of the insurance policies
expire on June 30, 1997. The aggregate premium for these insurance policies is
$791,445 for the directors and officers liability coverage and $110,753 for the
pension trust liability coverage. It is expected that the above liability
insurance coverage will be renewed or replaced upon expiration of the above
policies.
Compensation Committee Interlocks and Insider Participation
Mr. Ivan Seidenberg, the President and Chief Executive Officer of NYNEX,
who is one of the directors standing for re-election, serves on CVS'
Compensation Committee. Mr. Stanley Goldstein, the Chairman and Chief Executive
Officer of CVS, serves on the Board of Directors of NYNEX but does not serve on
NYNEX's Compensation Committee.
17
<PAGE> 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Share Ownership Information of Current CVS Directors and Named Executive
Officers
Share ownership information for current directors and executive officers
named in the Summary Compensation Table on page 12 hereof is set forth below.
Mr. Jordan and Mr. Rosenthal are current directors who are not standing for
re-election at the next meeting of stockholders of CVS.
<TABLE>
<CAPTION>
OWNERSHIP OF CVS COMMON STOCK(1)
---------------------------------
NAME NUMBER PERCENT
- ------------------------------------------------------------- --------- -------
<S> <C> <C>
Allan J. Bloostein........................................... 10,087(2)(5) *
Charles Conaway.............................................. 111,504(2)(3)(4) *
W. Don Cornwell.............................................. 3,565(2)(5) *
Thomas P. Gerrity............................................ 4,001(2)(5) *
Stanley P. Goldstein......................................... 838,483(2)(3)(4)(6) *
Michael H. Jordan............................................ 10,382(2)(5) *
William H. Joyce............................................. 4,465(2)(5) *
Terry R. Lautenbach.......................................... 8,730(2)(5) *
Larry J. Merlo............................................... 40,892(2)(3)(4) *
Terrence Murray.............................................. 1,309(6) *
Daniel C. Nelson............................................. 119,278(2)(3)(4) *
Harvey Rosenthal............................................. 432,640(2)(4)(5) *
Thomas M. Ryan............................................... 221,863(2)(3)(4) *
Ivan G. Seidenberg........................................... 4,620(2)(5) *
Patricia Carry Stewart....................................... 9,740(2)(5) *
M. Cabell Woodward, Jr....................................... 13,240(2)(5) *
All directors and executive officers as a group (18
persons)................................................... 1,885,422(2)(3)(4)(6) 1.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, ownership means sole voting and investment
power. The number of shares and other information indicated in this table
are as of February 17, 1997.
(2) The following shares of CVS Common Stock included above for the indicated
persons and group are not presently owned, but are subject to options which
were outstanding on February 17, 1997 and were exercisable within 60 days
thereafter: Mr. Goldstein, 660,583; each of Messrs. Bloostein, Jordan,
Woodward and Ms. Stewart, 9,240; Mr. Lautenbach, 6,930; Mr. Gerrity, 2,310;
Mr. Seidenberg, 4,620; Messrs. Joyce and Cornwell, 3,465; Mr. Rosenthal
411,517; Mr. Ryan, 184,316; Mr. Conaway, 93,544; Mr. Nelson, 98,163; Mr.
Merlo, 34,473; directors and executive officers as a group, 1,588,274.
(3) The following shares of CVS Common Stock included above for the indicated
persons and group were granted under CVS' Omnibus Stock Incentive Plan and,
although no longer subject to performance standards since the one year
performance period for these awards has expired, are subject to certain
restrictions as to continued employment and transfer of such shares as
provided in the plan: Mr. Goldstein, 9,177; Mr. Ryan, 33,044; Mr. Conaway,
17,960; Mr. Nelson, 18,545; Mr. Merlo, 6,419; executive officers as a group,
87,840.
(4) The CVS ESOP, established in 1989, held as of February 17, 1997, 5,526,677
shares of CVS ESOP Preference Stock. The Bank of New York, the trustee of
the CVS ESOP, will vote shares held by the CVS ESOP in proportion to
instructions received from plan participants. As of December 31, 1996 the
last date on which an allocation was made, Mr. Goldstein has been allocated
776.619 shares; Mr. Ryan has been allocated 750.062 shares; Mr. Conaway has
been allocated 203.498 shares; Mr. Nelson has been allocated 147.150 shares;
Mr. Merlo has been allocated 462.799 shares; Mr. Rosenthal has been
allocated 720.492 shares; and all executive officers as a group have been
allocated 3,595.170 shares. These amounts have not been included in the
above table.
(5) The receipt of the following shares of Common Stock received as director
compensation has been deferred pursuant to the 1996 Directors Stock Plan:
Mr. Bloostein, 3,558 shares; Mr. Cornwell, 1,026 shares; Mr. Gerrity, 183
shares; Mr. Jordan, 2,523 shares; Mr. Joyce, 1,393 shares; Mr. Lautenbach,
1,911 shares;
18
<PAGE> 19
Mr. Seidenberg, 1,185 shares; Ms. Stewart, 3,711 shares; and Mr. Woodward,
5,573 shares. These amounts have not been included in the above table.
(6) Of the shares shown opposite Mr. Goldstein's name, 20,000 shares are held by
Mr. Goldstein's wife. Mr. Goldstein disclaims beneficial ownership of such
shares. Of the shares shown opposite Mr. Murray's name, 500 shares are held
by a charitable foundation. Mr. Murray disclaims beneficial ownership of
such shares.
Share Ownership Information of Certain Principal Stockholders
CVS is not aware of any person who owned beneficially more than 5% of the
outstanding voting securities of CVS as of February 17, 1997, except as shown in
the following table:
<TABLE>
<CAPTION>
PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER NO. OF SHARES OF CLASS
- ------------------------------------- ------------------------------------ ------------- --------
<S> <C> <C> <C>
Common Stock......................... FMR Corp.(1) 15,947,754 14.9%
82 Devonshire Street
Boston, MA 02109
Common Stock......................... Brinson Partners, Inc.(2) 6,904,354 6.5%
209 S. LaSalle Street,
11th Floor
Chicago, IL 60604-1295
Series One ESOP Convertible
Preference Stock................... CVS Corporation and Subsidiaries 5,526,677 100%
Employee Stock Ownership Plan Trust
c/o Bank of New York, as Trustee(3)
48 Wall Street New York, NY 10005
</TABLE>
- ---------------
* This calculation is based on all outstanding shares of CVS Common Stock and
CVS ESOP Preference Stock as of February 17, 1997. The percent of voting
securities owned by FMR Corp., Brinson Partners, Inc. and the CVS ESOP are
14.0%, 6.1% and 5.8%, respectively.
(1) FMR Corp. ("FMR") filed a statement with the SEC dated December 12, 1996 on
Schedule 13G under the Securities Exchange Act of 1934, as the parent
holding company in accordance with Rule 13d-1(b)(ii)(G) of such Act,
disclosing beneficial ownership of greater than 5% of CVS Common Stock
(15,947,754 shares). According to the statement, FMR and/or subsidiaries
have sole voting power with respect to 951,613 of such shares and sole
dispositive power over all of these shares, and FMR has certified that all
of these shares were acquired in the ordinary course of business, and not
for the purpose of changing or influencing the control of CVS.
(2) Share ownership information relating to Brinson Partners, Inc. set forth in
the table above is based on information contained in a 13(f) Filing Report
obtained from CDA/Spectrum as of August 31, 1996.
(3) Each participant in the CVS ESOP instructs the Trustee of the CVS ESOP how
to vote his or her shares. As to unallocated shares and shares with respect
to which the Trustee receives no timely voting instructions, the Trustee,
pursuant to the ESOP Trust Agreement, votes these shares in the same
proportion as it votes all of the shares with respect to which it has
received timely voting instructions. Currently, each share of CVS ESOP
Preference Stock is entitled to approximately 1.2 votes per share on all
matters submitted to a vote of the holders of CVS Common Stock, voting
together with the holders of CVS Common Stock as a single class.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
ITEM 14(A) The following documents are filed as part of this Annual Report
on Form 10-K.
ITEM 14(A)(1) AND (2) The consolidated financial statements of CVS
Corporation incorporated herein by reference to the Annual Report to
Shareholders for the fiscal year ended December 31, 1996 and the related
consolidated financial statement schedule are set forth in the Index to
Consolidated Financial Statements and Schedule on page 24 hereof. See "Financial
Statements and Supplementary Data" at Item 8 to this Annual Report on Form 10-K.
Other financial statement schedules have not been included because they are not
applicable or the information is included in the financial statements or notes
thereto.
ITEM 14(A)(3) Exhibits
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant (the "CVS
Charter").
3.2 Bylaws of the Registrant (the "CVS Bylaws").
4 Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which
defines the rights of holders of long-term debt of the Registrant and its
subsidiaries is filed herewith. The Registrant hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Registration Statement of the Registrant on Form 8-B dated November 4,
1996 and filed under the Securities Exchange Act of 1934 on November 5,
1996).
4.2 Amended and Restated Certificate of Incorporation of the Registrant (see
Exhibit 3.1 hereto).
4.3 Bylaws of the Registrant (see Exhibit 3.2 hereto).
10(i)(1) Stock Purchase Agreement dated as of October 14, 1995 between The TJX
Companies, Inc. and Melville Corporation, as amended November 17, 1995
(incorporated by reference to Exhibits 2.1 and 2.2 to Melville's Current
Report on Form 8-K dated December 4, 1995).
10(i)(2) Stock Purchase Agreement dated as of March 25, 1996 between Melville
Corporation and Consolidated Stores Corporation, as amended May 3, 1996
(incorporated by reference to Exhibits 2.1 and 2.2 to Melville's Current
Report on Form 8-K dated May 5, 1996).
10(i)(3) Distribution Agreement dated as of September 24, 1996 among Melville
Corporation, Footstar, Inc. and Footstar Center, Inc. (incorporated by
reference to Exhibit 99.1 to Melville's Current Report on Form 8-K dated
October 28, 1996).
10(i)(4) Tax Disaffiliation Agreement dated as of September 24, 1996 among Melville
Corporation, Footstar, Inc. and certain subsidiaries named therein
(incorporated by reference to Exhibit 99.2 to Melville's Current Report on
Form 8-K dated October 28, 1996).
10(i)(5) Agreement and Plan of Merger dated as of February 6, 1997 among the
Registrant, Revco D.S., Inc. and North Acquisition Corp. (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated
February 7, 1997).
10(i)(6) Stockholder Agreement dated as of February 6, 1997 between the Registrant and
Zell/ Chilmark Fund, L.P. (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated February 7, 1997).
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------------ -----------------------------------------------------------------------------
<S> <C> <C>
10(iii)(A) (i) 1973 Stock Option Plan (incorporated by reference to Exhibit (10)(iii)(A)(i)
to Melville Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987).
(ii) 1987 Stock Option Plan (incorporated by reference to Exhibit
(10)(iii)(A)(iii) to Melville Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987).
(iii) 1989 Directors Stock Option Plan (incorporated by reference to Exhibit B to
Melville Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
(iv) Melville Corporation Omnibus Stock Incentive Plan (incorporated by reference
to Exhibit B to Melville Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 and Exhibit A to Melville's definitive
Proxy Statement dated March 7, 1995).
(v) Profit Incentive Plan of Melville Corporation (incorporated by reference to
Exhibit A to Melville Corporation's definitive Proxy Statement dated March
14, 1994).
(vi) Supplemental Retirement Plan for Select Senior Management of Melville
Corporation I as amended through July 1995 (incorporated by reference to
Exhibit 10(iii)(A)(vii) to Melville's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
(vii) Supplemental Retirement Plan for Select Senior Management of Melville
Corporation II as amended through July 1995 (incorporated by reference to
Exhibit 10(iii)(A)(viii) to Melville's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
(viii) Income Continuation Policy for Select Senior Executives of Melville
Corporation as amended through May 12, 1988 (incorporated by reference to
Exhibit 10 (viii) to Melville's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994).
(ix) Melville Corporation 1996 Directors Stock Plan (incorporated by reference to
Exhibit A to Melville's definitive Proxy Statement dated March 7, 1996).
(x) Form of Employment Agreements between the Registrant and each of Messrs.
Ryan, Conaway, Nelson and Merlo.
11 Statement re: Computation of Net Earnings Per Share.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
13 1996 Annual Report to Stockholders (Sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management's Responsibility for Financial Reporting," "Independent Auditors
Report," "Consolidated Statements of Operations," "Consolidated Balance
Sheets," "Consolidated Statements of Shareholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements," and
"Five-Year Financial Summary").
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
27A Restated Financial Data Schedule -- December 31, 1995.
27B Restated Financial Data Schedule -- September 30, 1995.
27C Restated Financial Data Schedule -- July 1, 1995.
27D Restated Financial Data Schedule -- April 1, 1995.
</TABLE>
21
<PAGE> 22
ITEM 14(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on December 6, 1996 reporting on the
initial public offering of Linens 'n Things, Inc., an indirect subsidiary of
CVS. On December 2, 1996, through its indirect, wholly-owned subsidiary, Nashua
Hollis CVS, Inc., CVS consummated an initial underwritten public offering of
13,000,000 shares of the common stock of Linens 'n Things, Inc., an indirect
subsidiary of CVS, at a price to the public of $15.50 per share.
The Company filed a Report on Form 8-K on October 28, 1996 reporting on the
spin-off of Footstar, Inc. ("Footstar") through the October 12, 1996
distribution by Melville of 100% of the shares of Footstar common stock to its
shareholders of record as of the close of business on October 2, 1996.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
CVS CORPORATION
Date: April 16, 1997 By: /s/ CHARLES C. CONAWAY
----------------------------------
Charles C. Conaway,
Executive Vice President and
Chief Financial Officer
23
<PAGE> 24
CVS CORPORATION AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
The consolidated financial statements of CVS Corporation together with the
report on such consolidated financial statements of KPMG Peat Marwick LLP dated
February 6, 1997 which appear on the pages listed below of the 1996 Annual
Report to Shareholders, are incorporated by reference in this Annual Report on
Form 10-K.
<CAPTION>
PAGE NUMBER
IN 1996
ANNUAL
REPORT TO
SHAREHOLDERS
------------
<S> <C>
Management's Responsibility for Financial Reporting........................... 34
Independent Auditors' Report.................................................. 35
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994............................................................... 36
Consolidated Balance Sheets as of December 31, 1996 and 1995.................. 37
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1996, 1995 and 1994..................................................... 38
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994............................................................... 39
Notes to Consolidated Financial Statements.................................... 40-52
Five-Year Financial Summary................................................... 53
PAGE
----
Included in Part IV of this report:
Consent of Independent Auditors for CVS Corporation and Subsidiary
Companies................................................................... F-1
Independent Auditors' Report on Consolidated Financial Statement Schedule..... F-2
Consolidated Financial Statement Schedule of CVS Corporation for the years
ended December 31, 1996, 1995 and 1994:
II -- Valuation and Qualifying Accounts.................................. S-1
</TABLE>
Schedules not included above have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or related notes.
24
<PAGE> 25
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
of CVS Corporation:
We consent to incorporation by reference in the Registration Statements
Numbers 33-40251, 33-17181, 2-97913, 2-77397 and 2-53766 on Form S-8 of CVS
Corporation of our report dated February 6, 1997, relating to the consolidated
balance sheets of CVS Corporation as of December 31, 1996 and 1995, and the
related consolidated statement of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report is incorporated by reference in the December 31, 1996 annual report
on Form 10-K of CVS Corporation and to our report dated February 6, 1997 on the
related financial statement schedule, which report appears in the December 31,
1996 annual report on Form 10-K of CVS Corporation.
Our reports refer to the adoption of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
effective October 1, 1995.
/s/ KPMG PEAT MARWICK LLP
....................................
KPMG PEAT MARWICK LLP
Providence, Rhode Island
March 28, 1997
F-1
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of CVS Corporation:
Under date of February 6, 1997, we reported on the consolidated balance
sheets of CVS Corporation as of December 31, 1996 and 1995, and related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996, as contained
in the 1996 annual report to shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed on page 41 of the Annual Report to Shareholders, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" effective October 1,
1995.
/s/ KPMG PEAT MARWICK LLP
....................................
KPMG PEAT MARWICK LLP
Providence, Rhode Island
February 6, 1997
F-2
<PAGE> 27
SCHEDULE II
CVS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED BALANCE AT
IN MILLIONS BEGINNING OF YEAR TO COSTS & EXPENSES(1)(3) DEDUCTIONS(2) END OF YEAR(3)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE ALLOWANCE
FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 1996 33.4 1.0 24.3 10.1
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 18.9 33.8 19.3 33.4
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 32.5 14.5 28.1 18.9
- -----------------------------------------------------------------------------------------------------------------
NOTES:
(1) 1995 includes a charge of $21.3 million that relates to certain receivables
of former divisions that were retained by the Company subsequent to the sale
of the related divisions.
(2) 1996 includes a deduction of $21.2 million that relates to the actual
write-off of the receivable discussed in Note (1) above.
(3) 1996 amounts are consistent with the historical results of the Company's
continuing operations.
</TABLE>
S-1
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CVS CORPORATION
CVS Corporation, a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is "CVS Corporation" and the name
under which the Corporation was originally formed is "CVS Corporation." The
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on August 22, 1996.
2. This Amended and Restated Certificate of Incorporation (this
"Restated Certificate") has been duly adopted by the Board of Directors of the
Corporation in accordance with Sections 241 and 245 of the General Corporation
Law of the State of Delaware.
3. Pursuant to Sections 241 and 245 of the General Corporation Law
of the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation of the Corporation.
4. The text of the Certificate of Incorporation as heretofore
amended is hereby restated and further amended to read in its entirety as
hereinafter set forth:
FIRST: The name of the Corporation is "CVS Corporation".
SECOND: The address of its registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as the same exists or may hereafter be
amended ("Delaware Law").
<PAGE> 2
FOURTH: The authorized capital stock of the Corporation consists of
(i) 300,000,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), (ii) 120,619 shares of Cumulative Preferred Stock, par value $.01 per
share ("Preferred Stock"), and (iii) 50,000,000 shares of Preference Stock, par
value $1 per share ("Preference Stock").
All the designations, preferences, privileges and voting powers of
the shares of each class, and the restrictions or qualifications thereof, shall
be as follows:
I. PROVISIONS GENERALLY APPLICABLE TO CAPITAL STOCK
I.A. Voting Rights of Common Stock
Each holder of Common Stock shall be entitled to one vote for each
share thereof held of record by such holder.
I.B. Ranking of Capital Stock
The Preferred Stock shall be senior to the Preference Stock and the
Common Stock, and the Preference Stock and the Common Stock shall be subject to
all the rights and preferences of the Preferred Stock as hereafter set forth.
The Preference Stock shall be senior to the Common Stock, and the Common Stock
shall be subject to all the rights and preferences of the Preference Stock as
hereafter set forth.
I.C. No Preemptive Rights
No stockholder of the Corporation shall be entitled as such, as a
matter of right, to subscribe for or purchase any part of any new or additional
issue of stock of any class or series whatsoever, any rights or options to
purchase stock of any class or series whatsoever, whether now or hereafter
authorized and whether issued for cash or other consideration or by way of
dividend.
I.D. Fractional Interests
In case any person shall become entitled to a fractional interest in
a share of Preferred Stock, of Preference Stock or of Common Stock, the
Corporation may deliver a scrip certificate representing such fractional
interest, which together with other similar scrip certificates aggregating a
whole share, may be surrendered in exchange for a stock certificate representing
one full share of Preferred Stock, Preference Stock or Common Stock as the case
may be; provided, however, that the rights of the holders of such scrip
certificates shall be subject to any conditions and limitations prescribed by
the Board of Directors, which may include a provision that after a specified
date the scrip certificate shall become absolutely void.
2
<PAGE> 3
II. PREFERRED STOCK
II.A. Provisions Generally Applicable to Preferred Stock
II.A.(i) The Preferred Stock may be issued from time to time in one
or more series, the shares of each series to have such designations,
preferences, privileges, and voting powers, and the restrictions or
qualifications thereof, as are stated and expressed herein or in a resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors as hereafter provided.
II.A.(ii) Authority is hereby expressly granted to the Board of
Directors, subject to the provisions of this Certificate and Delaware Law, to
authorize the issue of one or more series of Preferred Stock and with respect to
each such series to fix by resolution or resolutions providing for the issue of
such series:
(1) The number of shares of Preferred Stock which shall
comprise such series and the distinctive designation thereof;
(2) The dividend rate on the shares of such series (not
exceeding $6 a share per annum) and the date or dates from which
dividends shall accumulate;
(3) Whether or not the shares of such series shall be
subject to purchase and to redemption and the amount of premium, if
any (not exceeding $7 a share), which the holders of shares of such
series shall be entitled to receive over and above $100 a share and
any accrued dividends thereon upon the redemption thereof or upon
the voluntary liquidation, dissolution or winding up of the
Corporation;
(4) Whether or not the shares of such series shall be
subject to the operation of a sinking fund to be applied to the
purchase or redemption of the shares of such series for retirement
and, if such sinking fund be established, the terms and provisions
relative to the operation thereof;
(5) Whether or not the shares of such series shall be
made convertible into or exchangeable for any other class or classes
or for any other series of the same class of stock of the
Corporation and, if made so convertible or exchangeable, the
conversion price or prices or rates of exchange at which such
conversion or exchange may be made and the method, if any, of
adjusting the same;
(6) The restrictions, if any, on the payment of
dividends upon, and the making of distributions to, any class of
stock ranking junior to the shares of Preferred Stock, and the
restrictions, if any, on the purchase or redemption of the shares of
any such junior class; and
3
<PAGE> 4
(7) The voting rights, if any, of the shares of such
series other than those voting rights provided for in Section
II.A.(viii) of this Article Fourth.
II.A.(iii) All shares of any one series of Preferred Stock shall be
identical with each other in all respects except that shares of any one series
issued at different times may differ as to the dates from which dividends
thereon shall accumulate; and all series shall rank equally and be identical in
all respects except as permitted in the foregoing provisions of Section
II.A.(ii) of this Article Fourth.
II.A.(iv) The holders of shares of Preferred Stock of each series
shall be entitled to receive, when and as declared by the Board of Directors,
dividends payable in cash in, but not exceeding, the amount fixed for such
series. Such dividends shall be cumulative, so that if dividends on all
outstanding Preferred Stock of each series in the amount fixed therefor shall
not have been paid or declared and set apart for payment for all past dividend
periods, and for the dividend period current at the time, the deficiency shall
be fully paid, or dividends equal thereto declared and set apart for payment,
but without interest thereon, before any dividends on any class of stock of the
Corporation junior to the Preferred Stock shall be paid or declared and set
apart for payment.
Dividends shall not be declared or paid on the Preferred Stock of
any one series for any dividend period unless dividends have been or are
contemporaneously paid or declared and set apart for payment on the Preferred
Stock of all series for the dividend periods terminating on the same and all
earlier dates.
Any dividend paid in an amount less than full cumulative dividends
accrued or in arrears on all Preferred Stock then outstanding shall be divided
between the outstanding Preferred Stock in proportion to the amounts which would
be distributable per share to the Preferred Stock if full cumulative dividends
were declared and paid thereon.
After full cumulative dividends as aforesaid upon the Preferred
Stock of all series then outstanding shall have been paid for all past dividend
periods, and full dividends on the Preferred Stock then outstanding for the
current dividend period shall have been declared and paid or set apart for
payment, and after complying with all the provisions with respect to any sinking
fund or funds for any one or more series of Preferred Stock, then, and not
otherwise, dividends may be declared and paid upon any class of stock of the
Corporation junior to the Preferred Stock.
II.A.(v) In the event of any liquidation, dissolution or winding up
of the Corporation the Preferred Stock shall be preferred as to assets as well
as dividends and upon any such dissolution, liquidation or winding up, the
holders of the Preferred Stock of each series shall be entitled to receive and
be paid for each share thereof out of the assets of the Corporation (whether
capital or surplus) $100, together with an amount equal to the accrued and
unpaid dividends thereon computed to the date of payment, plus a premium of such
additional
4
<PAGE> 5
amount per share as shall have been fixed for such series in the event the
dissolution, liquidation or winding up is voluntary, before any distribution of
the assets shall be made to the holders of any class of stock of the Corporation
junior to the Preferred Stock. All assets remaining after such distribution to
the Preferred Stock shall then be distributed exclusively among the holders of
any class or classes of stock of the Corporation junior to the Preferred Stock.
If, upon any such dissolution, liquidation or winding up, the assets of the
Corporation distributable among the holders of Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets
or the proceeds thereof shall be distributed ratably among the holders of
Preferred Stock then outstanding until there shall have been paid in full and in
order, first, the sum of $100 in respect of each share; second, an amount
ratably in proportion to the amounts to which they are respectively entitled by
reason of accrued and unpaid dividends computed to the date of distribution; and
third, the balance ratably in proportion to the amounts to which they are
respectively entitled by way of premium.
II.A.(vi) The Corporation, at its option to be exercised by its
Board of Directors, may redeem the whole or any part of any series of Preferred
Stock which by its terms is subject to redemption, at the time or times provided
in the terms of such series, at a redemption price per share for each series
thereof, equal to: $100 plus a premium, if any, of such additional amount as
shall have been fixed as payable in case of redemption in respect of each share
of such series and an amount equal to any accrued and unpaid dividends thereon
computed to the date of redemption. If at any time less than all of the
Preferred Stock then outstanding and subject to redemption shall be called for
redemption, the Board of Directors may select the series of such Preferred Stock
to be redeemed and if less than all the Preferred Stock of any series is to be
called for redemption, the shares to be redeemed may be selected by lot or by
such other equitable method as the Board of Directors in its discretion may
determine. Notice of every such redemption, stating the redemption date, the
redemption price, and the place of payment thereof, shall be given by mailing a
copy of such notice at least thirty (30) days and not more than sixty (60) days
prior to the date fixed for redemption to the holders of record of the Preferred
Stock to be redeemed at their respective addresses as the same appear on the
books of the Corporation. A similar notice shall be published at least once in a
daily newspaper printed in the English language and published and of general
circulation in the Borough of Manhattan, the City of New York. At any time after
notice of redemption has been given in the manner prescribed by the Board of
Directors to the holders of stock so to be redeemed the Corporation may deposit
with a bank or trust company having capital, surplus and undivided profits of at
least $5,000,000 named in such notice, the redemption price, in trust, for
payment on or before the date fixed for redemption, as aforesaid, to the
respective orders of the holders of the shares so to be redeemed, on such
endorsement to the Corporation or its nominee or otherwise, as may be required,
and upon surrender of the certificates for such shares. Upon the deposit of the
said redemption price as aforesaid, or, if no such deposit is made, upon the
said redemption date (unless the Corporation shall default in making payment of
the redemption price as set forth in such notice), such holders shall cease to
be stockholders with respect to the said shares, and from and after the making
of the said deposit, or, if no such deposit is made, after the redemption date
(the Corporation
5
<PAGE> 6
not having defaulted in making payment of the redemption price as set forth in
such notice), the said shares shall no longer be transferable on the books of
the Corporation, and the said holders shall have no interest in or claim against
the Corporation with respect to the said shares but shall be entitled only to
such conversion rights (if any) on or before the date fixed for redemption as
may be provided with respect to such shares or to receive payment of the
redemption price without interest thereon, upon endorsement; provided, that any
funds so deposited by the Corporation and unclaimed at the end of one year from
the date fixed for such redemption shall be repaid to the Corporation upon its
request, after which repayment the holders of such shares so called for
redemption shall look only to the Corporation for the payment of the redemption
price thereof. Any funds so deposited, which shall not be required for such
redemption because of the exercise of any right of conversion or otherwise
subsequently to the date of such deposit, shall be returned to the Corporation
forthwith. Any interest accrued on any funds so deposited shall belong to the
Corporation and shall be paid to it from time to time.
In order to facilitate the redemption of any shares of Preferred
Stock, the Board of Directors is authorized to cause the transfer books of the
Corporation to be closed as to the shares to be redeemed.
The Corporation shall have the right, provided full cumulative
dividends on the Preferred Stock shall have been paid for past dividend periods
and the Corporation shall not then be in default as to any payment required for
any sinking fund created with respect to any series of Preferred Stock, to
purchase Preferred Stock of any series which is subject to purchase by the terms
of such series, at prices not in excess of the then redemption price thereof,
either for the purpose of redemption or retirement or to be held, used and
disposed of as treasury shares.
II.A.(vii) If at any time the Corporation shall have failed to pay
dividends in full on the Preferred Stock, thereafter and until dividends in
full, including all accrued and unpaid dividends, on Preferred Stock outstanding
shall have been paid, or declared and set aside for payment, the Corporation
shall not redeem any Preferred Stock except as a whole and shall not purchase
any Preferred Stock except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders of
the Preferred Stock upon the same terms as to any series, and shall not purchase
or redeem any other shares of any class ranking on a parity with or junior to
the Preferred Stock as to dividends or as to assets.
II.A.(viii) Special Voting Rights of Preferred Stock
(1) The Corporation shall not, without the affirmative vote at a
meeting, or the written consent with or without a meeting, of the holders of at
least two-thirds of the then outstanding Preferred Stock of all series:
6
<PAGE> 7
(a) Change the express terms and provisions applicable
to all series of the Preferred Stock in any material respect
prejudicial to the holders thereof; or
(b) Create any class of stock which shall be preferred
as to dividends or as to assets over the Preferred Stock.
(2) The Corporation shall not, without the affirmative vote at a
meeting, or the written consent with or without a meeting, of the holders of at
least two-thirds of the outstanding Preferred Stock of any particular series,
change the express terms of the special provisions for such series as provided
in this Certificate or in the resolution or resolutions of the Board of
Directors providing for the issue of such series in any material respect
prejudicial to the holders of shares of such series.
(3) The Corporation shall not without the affirmative vote at a
meeting, or the written consent with or without a meeting, of the holders of at
least a majority of the then outstanding Preferred Stock of all series, increase
the authorized number of shares of Preferred Stock or create any class of stock
which shall rank on a parity with the Preferred Stock as to dividends or as to
assets.
(4) If the Corporation shall have failed to pay dividends upon the
Preferred Stock in an aggregate amount equal to four full quarterly dividends on
any series of the Preferred Stock at the time outstanding, the holders of
Preferred Stock shall have the right, voting separately as a class at the annual
meeting of stockholders, to elect one-third (or the nearest number thereto) of
the members of the Board of Directors of the Corporation until such time as all
dividends accumulated on the Preferred Stock shall have been paid in full; and
upon such payment in full of all dividends accumulated on the Preferred Stock,
such special voting rights of holders thereof shall cease, subject to re-vesting
in the event of each and every subsequent default of the character above
mentioned.
III. PREFERENCE STOCK
III.A. Provisions Generally Applicable to Preference Stock
III.A.(i) The Preference Stock may be issued from time to time by
the Board of Directors as shares of one or more series. Subject to the
provisions hereof and the limitations prescribed by law, the Board of Directors
is expressly authorized, prior to issuance, by adopting resolutions providing
for the issuance of shares of any particular series and, if and to the extent
from time to time required by law, by filing a certificate pursuant to the
Delaware Law (or other laws hereafter in effect relating to the same or
substantially similar subject matter), to establish the number of shares to be
included in each such series and to fix the designations, relative rights,
preferences and limitations of the shares of each such series. The authority of
the Board of Directors with respect to each series shall include, but not be
limited to, determination of the following:
7
<PAGE> 8
(1) the distinctive serial designation of such series
and the number of shares constituting such series (provided that the
aggregate number of shares constituting all series of Preference
Stock shall not exceed 50,000,000);
(2) the dividend rate, or basis for determining such
rate, if any, on shares of such series, whether dividends shall be
cumulative and, if so, from which date or dates;
(3) whether the shares of each series shall be
redeemable and, if so, the terms and conditions of such redemption,
including the date or dates upon and after which such shares shall
be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and at
different redemption dates;
(4) the obligation, if any, of the Corporation to retire
shares of such series pursuant to a sinking fund;
(5) whether shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or
classes or any other series of the same class of stock and, if so,
the terms and conditions of such conversion or exchange, including
the price or prices or the rate or rates of conversion or exchange
and the terms of adjustment, if any;
(6) whether the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and, if
so, the terms of such voting rights;
(7) the rights of the shares of such series in the event
of voluntary or involuntary liquidation, dissolution or winding up
of the Corporation;
(8) the restrictions, if any, on the payment of
dividends upon, and the making of distributions to, any class of
stock ranking junior to the shares of Preference Stock, and the
restrictions, if any, on the purchase or redemption of the shares of
any such junior class; and
(9) any other designations, relative rights, preferences
and limitations of such series.
8
<PAGE> 9
III.B. Series One ESOP Convertible Preference Stock
The number of shares, the designation, the relative rights, the
preferences and the limitations of the Series One ESOP Convertible Preference
Stock of the Corporation are as follows:
III.B.(i) Designation and Amount; Special Purpose
Restricted Transfer Issue
(1) The shares of this series of Preference Stock shall be
designated as Series One ESOP Convertible Preference Stock ("Series One
Preference Stock") and the number of shares constituting such series shall be
6,688,494.
(2) Shares of Series One Preference Stock shall be issued only to a
trustee acting on behalf of an employee stock ownership plan or other employee
benefit plan of the Corporation. In the event of any transfer of shares of
Series One Preference Stock to any person other than (a) the issuance of Series
One Preference Stock to any such plan trustee or (b) a distribution of Series
One Preference Stock by any such plan trustee to a participant in any such plan
in satisfaction of the distribution requirements of any such plan or any
investment elections provided to participants pursuant to any such plan, the
shares of Series One Preference Stock so transferred, upon such transfer and
without any further action by the Corporation or the holder, shall be
automatically converted into shares of Common Stock on the terms otherwise
provided for the conversion of shares of Series One Preference Stock into shares
of Common Stock pursuant to Section III.B.(v) hereof and no such transferee
shall have any of the voting powers, preferences and relative, participating,
optional or special rights ascribed to shares of Series One Preference Stock
hereunder but, rather, only the powers and rights pertaining to the Common Stock
into which such shares of Series One Preference Stock shall be so converted.
Certificates representing shares of Series One Preference Stock shall be
legended to reflect such restrictions on transfer. Notwithstanding the foregoing
provisions of this Section III.B.(i)(2), shares of Series One Preference Stock
(a) may be converted into shares of Common Stock as provided by Section
III.B.(v) hereof and the shares of Common Stock issued upon such conversion may
be transferred by the holder thereof as permitted by law and (b) shall be
redeemable by the Corporation upon the terms and conditions provided by Sections
III.B.(vi), (vii) and (viii) hereof.
III.B.(ii) Dividends and Distributions
(1) Subject to the provisions for adjustment hereinafter set forth,
the holders of shares of Series One Preference Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available therefor, cash dividends ("Preference Dividends") in an amount per
share equal to the greater of (a) the sum of the aggregate amounts of regular
cash dividends paid during the periods ending on December 31, 1989, October 31,
1990, October 31, 1991, October 31, 1992 and December 31, 1993 in each year
thereafter (each a "Dividend Payment Date") on the number of shares of Common
Stock into
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<PAGE> 10
which one share of Series One Preference Stock could be converted pursuant to
Section III.B.(v) hereof, calculated on the basis of the Conversion Price (as
defined in Section III.B.(v) hereof and as adjusted from time to time pursuant
to Section III.B.(ix) hereof) in effect on each record date for any such regular
quarterly cash dividends on Common Stock paid during such one year period, and
(b) $3.90 per share per annum, and no more; provided that the first dividend on
the Series One Preference Stock shall be $3.63. For purposes of this Section
III.B.(ii)(1), "regular cash dividends" on the Common Stock shall mean any cash
dividends on the Common Stock which are not "Extraordinary Distributions" as
defined in Section III.B.(ix)(7). Preference Dividends shall be payable
annually, on each Dividend Payment Date, commencing on the Dividend Payment Date
in 1989, to holders of record at the start of business on such Dividend Payment
Date. Preference Dividends shall begin to accrue on outstanding shares of Series
One Preference Stock from the date of issuance of such shares of Series One
Preference Stock. The amount of Preference Dividends accrued as of any date on
each share of Series One Preference Stock shall be equal to the greater of (x)
the sum of the aggregate amounts of regular cash dividends paid during the
period beginning on the most current previous Dividend Payment Date and ending
on the date as of which accrual is being determined on the number of shares of
Common Stock into which one share of Series One Preference Stock could be
converted pursuant to Section III.B.(v) hereof, calculated as provided in clause
(a) above, and (y) $3.90 per annum accrued on a daily basis (whether or not the
Corporation shall have surplus at the time) for the period beginning on the most
recent previous Dividend Payment Date and ending on the date as of which accrual
is being determined, computed for any period less than a full annual period
between Dividend Payment Dates on the basis of a 360 day year of 30 day months;
provided that a total dividend payment of $3.63 per share shall accrue for the
period from the date of issuance of the Series One Preference Stock until
December 31, 1989. Accumulated but unpaid Preference Dividends shall cumulate as
of the Dividend Payment Date on which they first become payable, but no interest
shall accrue on accumulated but unpaid Preference Dividends.
(2) So long as any Series One Preference Stock shall be outstanding,
no dividend shall be declared or paid or set apart for payment on any other
series of stock ranking on a parity with the Series One Preference Stock as to
dividends, unless there shall also be or have been declared and paid or set
apart for payment on the Series One Preference Stock, like dividends for all
dividend payment periods of the Series One Preference Stock ending on or before
the dividend payment date of such parity stock, ratably in proportion to the
respective amounts of dividends accumulated and unpaid through such dividend
payment period on the Series One Preference Stock and accumulated and unpaid or
payable on such parity stock through the dividend payment period on such parity
stock next preceding such dividend payment date. In the event that full
cumulative dividends on the Series One Preference Stock have not been declared
and paid or set apart for payment when due, the Corporation shall not declare or
pay or set apart for payment any dividends or make any other distributions on,
or make any payment on account of the purchase, redemption or other retirement
of any other class of stock or series thereof of the Corporation ranking, as to
dividends or as to distributions in the event of a liquidation, dissolution or
winding-up of the Corporation, junior
10
<PAGE> 11
to the Series One Preference Stock until full cumulative dividends on the Series
One Preference Stock shall have been paid or declared and provided for;
provided, however, that the foregoing shall not apply to (a) any dividend
payable solely in any shares of any stock ranking, as to dividends or as to
distributions in the event of a liquidation, dissolution or winding-up of the
Corporation, junior to the Series One Preference Stock, or (b) the acquisition
of shares of any stock ranking, as to dividends or as to distributions in the
event of a liquidation, dissolution or winding-up of the Corporation, junior to
the Series One Preference Stock either (x) pursuant to any employee or director
incentive or benefit plan or arrangement (including any employment, severance or
consulting agreement) of the Corporation or any subsidiary of the Corporation
heretofore or hereafter adopted or (y) in exchange solely for shares of any
other stock ranking junior to the Series One Preference Stock.
III.B.(iii) Voting Rights
The holders of shares of Series One Preference Stock shall have the
following voting rights:
(1) The holders of Series One Preference Stock shall be entitled to
vote on all matters submitted to a vote of the holders of Common Stock of the
Corporation, voting together with the holders of Common Stock as one class. Each
share of the Series One Preference Stock shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
Series One Preference Stock could be converted on the record date for
determining the stockholders entitled to vote, rounded to the nearest one-tenth
of a vote; it being understood that whenever the "Conversion Price" (as defined
in Section III.B.(v) hereof) is adjusted as provided in Section III.B.(ix)
hereof, the voting rights of the Series One Preference Stock shall also be
similarly adjusted.
(2) Except as otherwise required by law or set forth herein, holders
of Series One Preference Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for the taking of any
corporate action; provided, however, that the vote of at least 66- 2/3% of the
outstanding shares of Series One Preference Stock, voting separately as a
series, shall be necessary to adopt any alteration, amendment or repeal of any
provision of the Certificate of Incorporation of the Corporation, as amended
(including any such alteration, amendment or repeal effected by any merger or
consolidation in which the Corporation is the surviving or resulting
corporation), if such amendment, alteration or repeal would alter or change the
powers, preferences or special rights of the shares of Series One Preference
Stock so as to affect them adversely. The authorization or issuance of
additional Common Stock, Preference Stock or Preferred Stock shall be deemed not
to affect the powers, preferences and special rights of the Series One
Preference Stock adversely for purposes of the preceding sentence.
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<PAGE> 12
III.B.(iv) Liquidation, Dissolution or Winding Up
(1) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the holders of Series One Preference Stock shall
be entitled to receive out of assets of the Corporation which remain after
satisfaction in full of all valid claims of creditors of the Corporation and
which are available for payment to stockholders and subject to the rights of the
holders of any stock of the Corporation ranking senior to or on a parity with
the Series One Preference Stock in respect of distributions upon liquidation,
dissolution or winding up of the Corporation, before any amount shall be paid or
distributed among the holders of Common Stock or any other shares ranking junior
to the Series One Preference Stock in respect of distributions upon liquidation,
dissolution or winding up of the Corporation, liquidating distributions in the
amount of $53.45 per share, plus an amount equal to all accrued and unpaid
dividends thereon to the date fixed for distribution, and no more. If upon any
liquidation, dissolution or winding up of the Corporation, the amounts payable
with respect to the Series One Preference Stock and any other stock ranking as
to any such distribution on a parity with the Series One Preference Stock are
not paid in full, the holders of the Series One Preference Stock and such other
stock shall share ratably in any distribution of assets in proportion to the
full respective preferential amounts to which they are entitled. After payment
of the full amount to which they are entitled as provided by the foregoing
provisions of Section III.B.(iv)(1), the holders of shares of Series One
Preference Stock shall not be entitled to any further right or claim to any of
the remaining assets of the Corporation.
(2) Neither the merger or consolidation of the Corporation with or
into any other corporation, nor the merger or consolidation of any other
corporation with or into the Corporation, nor the sale, transfer or lease of all
or any portion of the assets of the Corporation, shall be deemed to be a
dissolution, liquidation or winding up of the affairs of the Corporation for
purposes of this Section III.B.(iv), but the holders of Series One Preference
Stock shall nevertheless be entitled in the event of any such merger or
consolidation to the rights provided by Section III.B.(viii) hereof.
(3) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, stating the payment date or dates
when, and the place or places where, the amounts distributable to holders of
Series One Preference Stock in such circumstances shall be payable, shall be
given by first-class mail, postage prepaid, mailed not less than twenty (20)
days prior to any payment date stated therein, to the holders of Series One
Preference Stock, at the address shown on the books of the Corporation or any
transfer agent for the Series One Preference Stock.
III.B.(v) Conversion into Common Stock.
(1) A holder of shares of Series One Preference Stock shall be
entitled, at any time prior to the close of business on the date fixed for
redemption of such shares pursuant to Sections III.B.(vi), (vii) or (viii)
hereof, to cause any or all of such shares to be converted into
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<PAGE> 13
shares of Common Stock, initially at a conversion rate equal to the ratio of
$53.45 to the amount which initially shall be $53.45 and which shall be adjusted
as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred
to as the "Conversion Price") (that is, a conversion rate initially equivalent
to one share of Common Stock for each share of Series One Preference Stock so
converted but that is subject to adjustment as the Conversion Price is adjusted
as hereinafter provided).
(2) Any holder of shares of Series One Preference Stock desiring to
convert such shares into shares of Common Stock shall surrender the certificate
or certificates representing the shares of Series One Preference Stock being
converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), at the principal
executive office of the Corporation or the offices of the transfer agent for the
Series One Preference Stock or such office or offices in the continental United
States of an agent for conversion as may from time to time be designated by
notice to the holders of the Series One Preference Stock by the Corporation or
the transfer agent for the Series One Preference Stock, accompanied by written
notice of conversion. Such notice of conversion shall specify (a) the number of
shares of Series One Preference Stock to be converted and the name or names in
which such holder wishes the certificate or certificates for Common Stock and
for any shares of Series One Preference Stock not to be so converted to be
issued, and (b) the address to which such holder wishes delivery to be made of
such new certificates to be issued upon such conversion.
(3) Upon surrender of a certificate representing a share or shares
of Series One Preference Stock for conversion, the Corporation shall prepare and
send by hand delivery (with receipt to be acknowledged) or by first class mail,
postage prepaid, to the holder thereof or to such holder's designee, at the
address designated by such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled upon
conversion. In the event that there shall have been surrendered a certificate or
certificates representing shares of Series One Preference Stock, only part of
which are to be converted, the Corporation shall issue and deliver to such
holder or such holder's designee a new certificate or certificates representing
the number of shares of Series One Preference Stock which shall not have been
converted.
(4) The conversion into Common Stock of shares of Series One
Preference Stock at the option of the holder thereof shall be effective as of
the earlier of (a) the delivery to such holder or such holder's designee of the
certificates representing the shares of Common Stock deliverable upon conversion
thereof or (b) the commencement of business on the second business day after the
surrender of the certificate or certificates for the shares of Series One
Preference Stock to be converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto) as
provided by this Section III.B(v). On and after the effective day of conversion,
the person or persons entitled to receive the Common Stock deliverable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock, but no allowance or
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<PAGE> 14
adjustment shall be made in respect of dividends payable to holders of Common
Stock in respect of any period prior to such effective date. The Corporation
shall not be obligated to pay any dividends which shall have been declared and
shall be payable to holders of shares of Series One Preference Stock on a
Dividend Payment Date if such Dividend Payment Date for such dividend shall
coincide with or be on or subsequent to the effective date of conversion of such
shares.
(5) The Corporation shall not be obligated to deliver to holders of
Series One Preference Stock any fractional share or shares of Common Stock
deliverable upon any conversion of such shares of Series One Preference Stock,
but in lieu thereof may make a cash payment in respect thereof in any manner
permitted by law.
(6) The Corporation shall at all times reserve and keep available
out of its authorized and unissued Common Stock, or out of Common Stock held in
its treasury, solely for delivery upon the conversion of shares of Series One
Preference Stock as herein provided, free from any preemptive rights, such
number of shares of Common Stock as shall from time to time be deliverable upon
the conversion of all the shares of Series One Preference Stock then
outstanding. The Corporation shall prepare and shall use its best efforts to
obtain and keep in force such governmental or regulatory permits or other
authorizations as may be required by law, and shall comply with all requirements
as to registration or qualification of the Common Stock, in order to enable the
Corporation lawfully to deliver to each holder of record of Series One
Preference Stock such number of shares of its Common Stock as shall from time to
time be sufficient to effect the conversion of all shares of Series One
Preference Stock then outstanding and convertible into shares of Common Stock.
III.B.(vi) Redemption At the Option of the Corporation
(1) The Series One Preference Stock shall be redeemable, in whole or
in part, at the option of the Corporation at any time at the following
redemption prices per share, except that no such redemption at the option of the
corporation may be made prior to June 23, 1991 unless the Fair Market Value of
the Common Stock as of the date on which notice of redemption is first mailed
pursuant to Section III.B.(vi)(2) below shall be at least 130% of the then
current Conversion Price. The Fair Market Value of the Common Stock shall be
determined as provided in Section III.B.(ix)(7), except that for purposes of
this Section III.B.(vi)(1) the Adjustment Period used in calculating such Fair
Market Value shall be deemed to be the twenty (20) consecutive trading days
ending upon but excluding, the date on which notice of redemption is first
mailed:
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<TABLE>
<CAPTION>
DURING THE TWELVE-MONTH
PERIOD BEGINNING JUNE 23 PRICE PER SHARE
------------------------------- --------------------
<S> <C>
1989 $57.35
1990 $56.96
1991 $56.57
1992 $56.18
1993 $55.79
1994 $55.40
1995 $55.01
1996 $54.62
1997 $54.23
1998 $53.84
</TABLE>
and thereafter at $53.45 per share, plus, in each case, an amount equal to all
accrued and unpaid dividends thereon to the date fixed for redemption. Payment
of the redemption price shall be made by the Corporation in cash or shares of
Common Stock, or a combination thereof, as permitted by Section III.B.(vi)(4).
From and after the date fixed for redemption, dividends on shares of Series One
Preference Stock called for redemption will cease to accrue, such shares will no
longer be deemed to be outstanding and all rights in respect of such shares of
the Corporation shall cease, except the right to receive the redemption price.
If less than all of the outstanding shares of Series One Preference Stock are to
be redeemed, the Corporation shall either redeem a portion of the shares of each
holder determined pro rata based on the number of shares held by each holder or
shall select the shares to be redeemed by lot, as may be determined by the Board
of Directors of the Corporation.
(2) Unless otherwise required by law, notice of redemption will be
sent to the holders of Series One Preference Stock at the address shown on the
books of the Corporation or any transfer agent for the Series One Preference
Stock by first class mail, postage prepaid, mailed not less than twenty (20)
days nor more than sixty (60) days prior to the redemption date. Each such
notice shall state: (a) the redemption date; (b) the total number of shares of
the Series One Preference Stock to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be redeemed
from such holder; (c) the redemption price and the form of payment thereof; (d)
the place or places where certificates for such shares are to be surrendered for
payment of the redemption price; (e) that dividends on the shares to be redeemed
will cease to accrue on such redemption date; and (f) the conversion rights of
the shares to be redeemed, the period within which conversion rights may be
exercised, and the Conversion Price and number of shares of Common Stock
issuable upon conversion of a share of Series One Preference Stock at the time.
Upon surrender of the certificates for any shares so called for redemption and
not previously converted (properly endorsed or assigned for transfer, if the
Board of Directors of the Corporation shall so require and the notice shall so
state), such shares shall be redeemed by the Corporation at the date fixed for
redemption and at the redemption price set forth in this Section III.B.(vi).
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(3) Notwithstanding anything to the contrary contained in Section
III.B.(vi)(1), the Corporation may from time to time, in its sole discretion,
elect to redeem, upon notice as required in Section III.B.(vi)(2), all or part
of the shares of Series One Preference Stock at a price equal to the amount
payable in respect of such shares upon liquidation of the Corporation pursuant
to Section III.B.(iv) hereof (except that any redemption pursuant to clause (d)
below shall be at a price equal to the price payable upon redemption at the
option of the Corporation pursuant to Section III.B.(vi)(1) plus all accrued and
unpaid dividends to the date fixed for redemption) upon any of the following:
(a) In the event of a change in the federal tax law of the United
States of America which has the effect of precluding the Corporation
from claiming any of the tax deductions for dividends paid on the
Series One Preference Stock when such dividends are used as provided
under Section 404(k)(2) of the Internal Revenue code of 1986, as
amended (the "Code") and in effect on the date the shares of Series
One Preference Stock are initially issued; provided that notice of
any redemption pursuant to this clause (a) shall be given not more
than 90 days following the later of the effectiveness or the
adoption of any such change in the federal tax law of the United
States of America; or
(b) In the event of a determination by the Internal Revenue Service
that the Melville Corporation and Subsidiaries Employee Stock
Ownership Plan, dated as of January 1, 1989, as amended, or any
successor plan ("the Plan"), as the same may be amended, is not
qualified within the meaning of Section 401(a) or is not an employee
stock ownership plan within the meaning of Section 4975(e)(7) of the
Code; or
(c) If the exclusion of interest received by any lender on any
borrowings by the trustee of the Plan from the lender's income
pursuant to Section 133 or any successor provision of the Code is
reduced to a percentage amount less than fifty percent (50%);
provided that notice of any redemption pursuant to this clause (c)
shall be given not more than 90 days following the later of the
effectiveness or the adoption of any such reduction; or
(d) If the corporation terminates the Plan or terminates future
contributions to the Plan; or
(e) If any shares of Series One Preference Stock are transferred to
a participant in the Plan, but only any such shares so transferred
may be redeemed pursuant to this clause (e); or
(f) In the event and to the extent that redemption of Series One
Preference Stock is necessary or appropriate to provide for
satisfaction of any investment election provided to participants in
accordance with the Plan; or
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(g) In the event and to the extent that redemption of Series One
Preference Stock is necessary or appropriate to provide for
distributions to be made to participants under the Plan.
(4) The Corporation, at its option, may make payment of the
redemption price required upon redemption of shares of Series One Preference
Stock pursuant to Section III.B.(vi)(1) above or clauses (a) through (f) of
Section III.B.(vi)(3) above in cash or in shares of Common Stock, or in a
combination of such shares and cash. The Corporation shall make payment of the
redemption price required upon redemption of shares of Series One Preference
Stock pursuant to clause (g) of Section III.B.(vi)(3) above in shares of Common
Stock, except that cash shall be paid in lieu of delivery of fractional shares.
Any shares of Common Stock delivered in payment of the redemption price pursuant
to this Section III.B.(vi) shall be valued for such purpose at their Fair Market
Value (as defined in Section III.B.(ix)(7) hereof, provided, however, that in
calculating their Fair Market Value the Adjustment Period shall be deemed to be
the five (5) consecutive trading days ending with, and including, the date of
redemption).
III.B.(vii) Other Redemption Rights
Shares of Series One Preference Stock shall be called for redemption
by the Corporation, through notice as required by Section III.B.(vi)(2), for
cash or, if the Corporation so elects, in shares of Common Stock, or a
combination of such shares and cash, any such shares of Common Stock to be
valued for such purpose as provided by Section III.B.(vi)(4), at a redemption
price of $53.45 per share plus accrued and unpaid dividends thereon to the date
fixed for redemption, at any time and from time to time when and to the extent
necessary to provide for payment of principal, interest or premium due and
payable (whether as scheduled or upon acceleration) on the 8.60% ESOP Notes Due
2008 of the trust under the Plan or any indebtedness incurred by the trustee for
the benefit of the Plan.
III.B.(viii) Consolidation, Merger, etc
(1) In the event that the Corporation shall consummate any
consolidation or merger or similar transaction, however named, pursuant to which
the outstanding shares of Common Stock are by operation of law exchanged solely
for or changed, reclassified or converted solely into stock of any successor or
resulting corporation (including the Corporation) that constitutes "qualifying
employer securities" with respect to a holder of Series One Preference Stock
within the meaning of Section 409(l) of the Code and Section 407(c)(5) of the
Employee Retirement Income Security Act of 1974, as amended, or any successor
provisions of law, and, if applicable, for a cash payment in lieu of fractional
shares, if any, the shares of Series One Preference Stock of such holder shall
be assumed by and shall become preferred stock of such successor or resulting
corporation, having in respect of such corporation insofar as possible the same
powers, preferences and relative, participating, optional or other special
rights (including the redemption rights provided by Sections III.B.(vi), (vii)
and (viii) hereof),
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and the qualifications, limitations or restrictions thereon, that the Series One
Preference Stock had immediately prior to such transaction, except that after
such transaction each share of the Series One Preference Stock shall be
convertible, otherwise on the terms and conditions provided by Section III.B.(v)
hereof, into the qualifying employer securities so receivable by a holder of the
number of shares of Common Stock into which such shares of Series One Preference
Stock could have been converted immediately prior to such transaction if such
holder of Common Stock failed to exercise any rights of election to receive any
kind or amount of stock, securities, cash or other property (other than such
qualifying employer securities and a cash payment, if applicable, in lieu of
fractional shares) receivable upon such transaction (provided that, if the kind
or amount of qualifying employer securities receivable upon such transaction is
not the same for each non-electing share, then the kind and amount of qualifying
employer securities receivable upon such transaction for each non-electing share
shall be the kind and amount so receivable per share by a plurality of the
non-electing shares). The rights of the Series One Preference Stock as preferred
stock of such successor or resulting company shall successively be subject to
adjustments pursuant to Section III.B.(ix) hereof after any such transaction as
nearly as possible equivalent to the adjustments provided for by such section
prior to such transaction. The Corporation shall not consummate any such merger,
consolidation or similar transaction unless all then outstanding shares of the
Series One Preference Stock shall be assumed and authorized by the successor or
resulting company as aforesaid.
(2) In the event that the Corporation shall consummate any
consolidation or merger or similar transaction, however named, pursuant to which
the outstanding shares of Common Stock are by operation of law exchanged for or
changed, reclassified or converted into other stock or securities or cash or any
other property, or any combination thereof, other than any such consideration
which is constituted solely of qualifying employer securities (as referred to in
Section III.B.(viii)(1)) and cash payments, if applicable, in lieu of fractional
shares, then the Corporation shall, at least twenty (20) days before
consummation of such transaction, give notice of such agreement and the material
terms thereof to each holder of Series One Preference Stock and the Corporation
shall simultaneously call for redemption, through notice as required by Section
III.B.(vi)(2), for cash at a redemption price equal to the amount payable in
respect of such shares upon liquidation of the Corporation pursuant to Section
III.B.(iv), all of the then outstanding shares of Series One Preferred Stock.
III.B.(ix) Anti-dilution Adjustments
(1) In the event the Corporation shall, at any time or from time to
time while any of the shares of the Series One Preference Stock are outstanding,
(a) pay a dividend or make a distribution in respect of the Common Stock in
shares of Common Stock, (b) subdivide the outstanding shares of Common Stock, or
(c) combine the outstanding shares of Common Stock into a smaller number of
shares, in each case whether by reclassification of shares, recapitalization of
the Corporation (including a recapitalization effected by a merger or
consolidation to which Section III.B.(viii) hereof does not apply) or otherwise,
the
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Conversion Price in effect immediately prior to such action shall be adjusted by
multiplying such Conversion Price by the fraction the numerator of which is the
number of shares of Common Stock outstanding immediately before such event and
the denominator of which is the number of shares of Common Stock outstanding
immediately after such event. An adjustment made pursuant to this Section
III.B.(ix)(1) shall be given effect, upon payment of such a dividend or
distribution, as of the record date for the determination of stockholders
entitled to receive such dividend or distribution (on a retroactive basis) and
in the case of a subdivision or combination shall become effective immediately
as of the effective date thereof.
(2) In the event that the Corporation shall, at any time or from
time to time while any of the shares of Series One Preference Stock are
outstanding, issue to holders of shares of Common Stock as a dividend or
distribution, including by way of a reclassification of shares or a
recapitalization of the Corporation, any right or warrant to purchase shares of
Common Stock (but not including as such a right or warrant any security
convertible into or exchangeable for shares of Common Stock) at a purchase price
per share less than the Fair Market Value (as hereinafter defined) of a share of
Common Stock on the date of issuance of such right or warrant, then, subject to
the provisions of Sections III.B.(ix)(5) and III.B.(ix)(6), the Conversion Price
shall be adjusted by multiplying such Conversion Price by the fraction the
numerator of which shall be the number of shares of Common Stock outstanding
immediately before such issuance of rights or warrants plus the number of shares
of Common Stock which could be purchased at the Fair Market Value of a share of
Common Stock at the time of such issuance for the maximum aggregate
consideration payable upon exercise in full of all such rights or warrants and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately before such issuance of rights or warrants plus the
maximum number of shares of Common Stock that could be acquired upon exercise in
full of all such rights and warrants.
(3) In the event the Corporation shall, at any time or from time to
time while any of the shares of Series One Preference Stock are outstanding,
issue, sell or exchange shares of Common Stock (other than pursuant to any right
or warrant to purchase or acquire shares of Common Stock (including as such a
right or warrant any security convertible into or exchangeable for shares of
Common Stock) and other than pursuant to any employee or director incentive or
benefit plan or arrangement, including any employment, severance or consulting
agreement, of the Corporation or any subsidiary of the Corporation heretofore or
hereafter adopted) for a consideration having a Fair Market Value on the date of
such issuance, sale or exchange less than the Fair Market Value of such shares
on the date of such issuance, sale or exchange, then, subject to the provisions
of Sections III.B.(ix)(5) and III.B.(ix)(6), the Conversion Price shall be
adjusted by multiplying such Conversion Price by the fraction the numerator of
which shall be the sum of (a) the Fair Market Value of all the shares of Common
Stock outstanding on the day immediately preceding the first public announcement
of such issuance, sale or exchange plus (b) the Fair Market Value of the
consideration received by the Corporation in respect of such issuance, sale or
exchange of shares of Common Stock, and the denominator of which shall be the
product of (a) the Fair
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Market Value of a share of Common Stock on the day immediately preceding the
first public announcement of such issuance, sale or exchange multiplied by (b)
the sum of the number of shares of Common Stock outstanding on such day plus the
number of shares of Common Stock so issued, sold or exchanged by the
Corporation. In the event the Corporation shall, at any time or from time to
time while any shares of Series One Preference Stock are outstanding, issue,
sell or exchange any right or warrant to purchase or acquire shares of Common
Stock (including as such a right or warrant any security convertible into or
exchangeable for shares of Common Stock), other than any such issuance to
holders of shares of Common Stock as a dividend or distribution (including by
way of a reclassification of shares or a recapitalization of the Corporation)
and other than pursuant to any employee or director incentive or benefit plan or
arrangement (including any employment, severance or consulting agreement) of the
Corporation or any subsidiary of the Corporation heretofore or hereafter
adopted, for a consideration having a Fair Market Value on the date of such
issuance, sale or exchange less than the Non-Dilutive Amount (as hereinafter
defined), then, subject to the provisions of Sections III.B.(ix)(5) and
III.B.(ix)(6), the Conversion Price shall be adjusted by multiplying such
Conversion Price by a fraction the numerator of which shall be the sum of (a)
the Fair Market Value of all the shares of Common Stock outstanding on the day
immediately preceding the first public announcement of such issuance, sale or
exchange plus (b) the Fair Market Value of the consideration received by the
Corporation in respect of such issuance, sale or exchange of such right or
warrant plus (c) the Fair Market Value at the time of such issuance of the
consideration which the Corporation would receive upon exercise in full of all
such rights or warrants, and the denominator of which shall be the product of
(a) the Fair Market Value of a share of Common Stock on the day immediately
preceding the first public announcement of such issuance, sale or exchange
multiplied by (b) the sum of the number of shares of Common Stock outstanding on
such day plus the maximum number of shares of Common Stock which could be
acquired pursuant to such right or warrant at the time of the issuance, sale or
exchange of such right or warrant (assuming shares of Common Stock could be
acquired pursuant to such right or warrant at such time).
(4) In the event the Corporation shall, at any time or from time to
time while any of the shares of Series One Preference Stock are outstanding,
make an Extraordinary Distribution (as hereinafter defined) in respect of the
Common Stock, whether by dividend, distribution, reclassification of shares or
recapitalization of the Corporation (including a recapitalization or
reclassification effected by a merger or consolidation to which Section
III.B.(viii) hereof does not apply) or effect a Pro Rata Repurchase (as
hereinafter defined) of Common Stock, the Conversion Price in effect immediately
prior to such Extraordinary Distribution or Pro Rata Repurchase shall, subject
to Sections III.B.(ix)(5) and III.B.(ix)(6), be adjusted by multiplying such
Conversion Price by the fraction the numerator of which is (a) the product of
(x) the number of shares of Common Stock outstanding immediately before such
Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Fair
Market Value (as herein defined) of a share of Common Stock on the record date
with respect to an Extraordinary Distribution, or on the applicable expiration
date (including all extensions thereof) of any tender offer which is a Pro Rata
Repurchase, or on the date of purchase with
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respect to any Pro Rata Repurchase which is not a tender offer, as the case may
be, minus (b) the Fair Market Value of the Extraordinary Distribution or the
aggregate purchase price of the Pro Rata Repurchase, as the case may be, and the
denominator of which shall be the product of (x) the number of shares of Common
Stock outstanding immediately before such Extraordinary Dividend or Pro Rata
Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of
Common Stock repurchased by the Corporation multiplied by (y) the Fair Market
Value of a share of Common Stock on the record date with respect to an
Extraordinary Distribution or on the applicable expiration date (including all
extensions thereof) of any tender offer which is a Pro Rata Repurchase or on the
date of purchase with respect to any Pro Rata Repurchase which is not a tender
offer, as the case may be. The Corporation shall send each holder of Series One
Preference Stock (a) notice of its intent to make any dividend or distribution
and (b) notice of any offer by the Corporation to make a Pro Rata Repurchase, in
each case at the same time as, or as soon as practicable after, such offer is
first communicated (including by announcement of a record date in accordance
with the rules of any stock exchange on which the Common Stock is listed or
admitted to trading) to holders of Common Stock. Such notice shall indicate the
intended record date and the amount and nature of such dividend or distribution,
or the number of shares subject to such offer for a Pro Rata Repurchase and the
purchase price payable by the Corporation pursuant to such offer, as well as the
Conversion Price and the number of shares of Common Stock into which a share of
Series One Preference Stock may be converted at such time.
(5) Notwithstanding any other provisions of this Section III.B.(ix),
the Corporation shall not be required to make any adjustment of the Conversion
Price unless such adjustment would require an increase or decrease of at least
one percent (1%) in the Conversion Price. Any lesser adjustment shall be carried
forward and shall be made no later than the time of, and together with, the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least one percent
(1%) in the Conversion Price.
(6) If the Corporation shall make any dividend or distribution on
the Common Stock or issue any Common Stock, other capital stock or other
security of the Corporation or any rights or warrants to purchase or acquire any
such security, which transaction does not result in an adjustment to the
Conversion Price pursuant to the foregoing provisions of this Section
III.B.(ix), the Board of Directors of the Corporation shall consider whether
such action is of such a nature that an adjustment to the Conversion Price
should equitably be made in respect of such transaction. If in such case the
Board of Directors of the Corporation determines that an adjustment to the
Conversion Price should be made, an adjustment shall be made effective as of
such date as is determined by the Board of Directors of the Corporation. The
determination of the Board of Directors of the Corporation as to whether an
adjustment to the Conversion Price should be made pursuant to the foregoing
provisions of this Section III.B.(ix)(6), and, if so, as to what adjustment
should be made and when, shall be final and binding on the Corporation and all
stockholders of the Corporation. The Corporation shall be entitled to make such
additional adjustments in the Conversion Price, in addition to those
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required by the foregoing provisions of this Section III.B.(ix), as shall be
necessary in order that any dividend or distribution in shares of capital stock
of the Corporation, subdivision, reclassification or combination of shares of
stock of the Corporation or any recapitalization of the Corporation shall not be
taxable to holders of the Common Stock.
(7) For purposes of this Section III.B.(ix), the following
definitions shall apply:
"Extraordinary Distribution" shall mean any dividend or other
distribution (effected while any of the shares of Series One Preference Stock
are outstanding) (a) of cash, where the aggregate amount of such cash dividend
or distribution together with the amount of all cash dividends and distributions
made during the preceding period of 12 months, when combined with the aggregate
amount of all Pro Rata Repurchases (for this purpose, including only that
portion of the aggregate purchase price of such Pro Rata Repurchase which is in
excess of the Fair Market Value of the Common Stock repurchased as determined on
the applicable expiration date (including all extensions thereof) of any tender
offer or exchange offer which is a Pro Rata Repurchase, or the date of purchase
with respect to any other Pro Rata Repurchase which is not a tender offer or
exchange offer made during such period), exceeds twelve and one-half percent
(12-1/2%) of the aggregate Fair Market Value of all shares of Common Stock
outstanding on the record date for determining the stockholders entitled to
receive such Extraordinary Distribution and (b) of any shares of capital stock
of the Corporation (other than shares of Common Stock), other securities of the
Corporation (other than securities of the type referred to in Section
III.B.(ix)(2)), evidences of indebtedness of the Corporation or any other person
or any other property (including shares of any subsidiary of the Corporation),
or any combination thereof. The Fair Market Value of an Extraordinary
Distribution for purposes of Section III.B.(ix)(4) shall be the sum of the Fair
Market Value of such Extraordinary Distribution plus the amount of any cash
dividends which are not Extraordinary Distributions made during such twelve
month period and not previously included in the calculation of an adjustment
pursuant to Section III.B.(ix)(4).
"Fair Market Value" shall mean, as to shares of Common Stock or any
other class of capital stock or securities of the Corporation or any other
issuer which are publicly traded, the average of the Current Market Prices (as
hereinafter defined) of such shares or securities for each day of the Adjustment
Period (as hereinafter defined). "Current Market Price" of publicly traded
shares of Common Stock or any other class of capital stock or other security of
the Corporation or any other issuer for a day shall mean the last reported sales
price, regular way, or, in case no sale takes place on such day, the average of
the reported closing bid and asked prices, regular way, in either case as
reported on the New York Stock Exchange Composite Tape or, if such security is
not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which such security is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the NASDAQ National Market System or, if such security
is not quoted on such National Market System, the average of the closing bid and
asked prices on each such day in the over-the-counter market as reported by
NASDAQ or, if bid and asked prices for such
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security on each such day shall not have been reported through NASDAQ, the
average of the bid and asked prices for such day as furnished by any New York
Stock Exchange member firm regularly making a market in such security selected
for such purpose by the Board of Directors of the Corporation or a committee
thereof on each trading day during the Adjustment Period. "Adjustment Period"
shall mean the period of five (5) consecutive trading days, selected by the
Board of Directors of the Corporation or a committee thereof, during the 20
trading days ending with, and including, the date as of which the Fair Market
Value of a security is to be determined; provided that such period of five
consecutive trading days shall end prior to the date on which such security
begins to trade "ex dividend" with respect to any dividend or distribution
giving rise to an adjustment under this Section III.B.(ix). The "Fair Market
Value" of any security which is not publicly traded or of any other property
shall mean the fair value thereof as determined by an independent investment
banking or appraisal firm experienced in the valuation of such securities or
property selected in good faith by the Board of Directors of the Corporation or
a committee thereof, or, if no such investment banking or appraisal firm is in
the good faith judgment of the Board of Directors or such committee available to
make such determination, as determined in good faith by the Board of Directors
of the Corporation or such committee.
"Non-Dilutive Amount" in respect of an issuance, sale or exchange by
the Corporation of any right or warrant to purchase or acquire shares of Common
Stock (including any security convertible into or exchangeable for shares of
Common Stock) shall mean the remainder of (a) the product of the Fair Market
Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum number
of shares of Common Stock which could be acquired on such date upon the exercise
in full of such rights and warrants (including upon the conversion or exchange
of all such convertible or exchangeable securities), whether or not exercisable
(or convertible or exchangeable) at such date, minus (b) the aggregate amount
payable pursuant to such right or warrant to purchase or acquire such maximum
number of shares of Common Stock; provided, however, that in no event shall the
Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence,
in the case of a security convertible into or exchangeable for shares of Common
Stock, the amount payable pursuant to a right or warrant to purchase or acquire
shares of Common Stock shall be the Fair Market Value of such security on the
date of the issuance, sale or exchange of such security by the Corporation.
"Pro Rata Repurchase" shall mean any purchase of shares of Common
Stock by the Corporation or any subsidiary thereof, whether for cash, shares of
capital stock of the Corporation, other securities of the Corporation, evidences
of indebtedness of the Corporation or any other person or any other property
(including shares of a subsidiary of the Corporation), or any combination
thereof, effected while any of the shares of Series One Preference Stock are
outstanding, pursuant to any tender offer or exchange offer subject to Section
13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or any successor provision of law, or pursuant to any other offer available to
substantially all holders of Common Stock; provided, however, that no purchase
of shares by the Corporation
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or any subsidiary thereof shall be deemed a Pro Rata Repurchase if made (a) in
open market transactions or (b) pursuant to a single tender offer subject to
Section 13(e) of the Securities Exchange Act commenced prior to December 31,
1989, but any purchase made in such a tender offer shall only be deemed not to
be a Pro Rata Repurchase to the extent that the aggregate amount used to
purchase Common Stock in such tender offer does not exceed $357,500,000. For
purposes of this subsection (ix)(7), shares shall be deemed to have been
purchased by the Corporation or any subsidiary thereof "in open market
transactions" if they have been purchased substantially in accordance with the
requirements of Rule 10b-18 as in effect under the Exchange Act, on the date
shares of Series One Preference Stock are initially issued by the Corporation or
on such other terms and conditions as the Board of Directors of the Corporation
or a committee thereof shall have determined are reasonably designed to prevent
such purchases from having a material effect on the trading market for the
Common Stock.
(8) Whenever an adjustment to the Conversion Price and the related
voting rights of the Series One Preference Stock is required pursuant to this
Section III.B.(ix), the Corporation shall forthwith place on file with the
transfer agent for the Common Stock and the Series One Preference Stock if there
be one, and with the Secretary of the Corporation, a statement signed by two
officers of the Corporation stating the adjusted Conversion Price determined as
provided herein and the resulting conversion ratio, and the voting rights (as
appropriately adjusted), of the Series One Preference Stock. Such statement
shall set forth in reasonable detail such facts as shall be necessary to show
the reason and the manner of computing such adjustment, including any
determination of Fair Market Value involved in such computation. Promptly after
each adjustment to the Conversion Price and the related voting rights of the
Series One Preference Stock, the Corporation shall mail a notice thereof and of
the then prevailing conversion ratio to each holder of shares of the Series One
Preference Stock.
III.B.(x) Ranking; Retirement of Shares
(1) The Series One Preference Stock shall rank senior to the Common
Stock as to the payment of dividends and the distribution of assets on
liquidation, dissolution and winding up of the Corporation. The Series One
Preference Stock shall rank on a parity with all other series of the
Corporation's Preference Stock as to the payment of dividends and the
distribution of assets on liquidation, dissolution and winding up of the
Corporation. Unless otherwise provided in the Certificate of Incorporation of
the Corporation, as amended, the Series One Preference Stock shall rank junior
to all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets on liquidation, dissolution or winding
up of the Corporation.
(2) Any shares of Series One Preference Stock acquired by the
Corporation by reason of the conversion or redemption of such shares as provided
by this Section III.B., or otherwise so acquired, shall be retired as shares of
Series One Preference Stock and restored
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to the status of authorized but unissued shares of preference stock, $1.00 par
value, of the Corporation, undesignated as to series, and may thereafter be
reissued as part of a new series of such Preference Stock as permitted by law.
III.B.(xi) Miscellaneous
(1) All notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have been given upon the earlier of receipt
thereof or three (3) business days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms of this Resolution) with postage prepaid, addressed:
(a) if to the Corporation, to its office as specified in its most recent Annual
Report on Form 10-K (or any successor report or form) or to the transfer agent
for the Series One Preference Stock, or other agent of the Corporation
designated as permitted by this Section III.B. or (b) if to any holder of the
Series One Preference Stock or Common Stock, as the case may be, to such holder
at the address of such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent for the Series
One Preference Stock or Common Stock, as the case may be) or (c) to such other
address as the Corporation or any such holder, as the case may be, shall have
designated by notice similarly given.
(2) The term "Common Stock" as used in this Section III.B. means the
Corporation's Common Stock of par value $.01, as the same exists at the date of
filing of this Certificate of Amendment of the Certificate of Incorporation of
the Corporation relating to Series One Preference Stock or any other class of
stock resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that, at any time as a
result of an adjustment made pursuant to Section III.B.(ix), the holder of any
shares of the Series One Preference Stock upon thereafter surrendering such
shares for conversion shall become entitled to receive any shares or other
securities of the Corporation other than shares of Common Stock, the Conversion
Price in respect of such other shares or securities so receivable upon
conversion of shares of Series One Preference Stock shall thereafter be
adjusted, and shall be subject to further adjustment from time to time, in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in Section III.B.(ix) hereof, and the
provisions of Sections (i) through (viii) and (x) and (xi) of this Article
Fourth.III.B. with respect to the Common Stock shall apply on like or similar
terms to any such other shares or securities.
(3) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series One Preference Stock or shares of Common Stock or
other securities issued on account of Series One Preference Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax which may be payable in
respect of any transfer involved in the issuance or delivery of shares of Series
One Preference
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Stock or Common Stock or other securities in a name other than that in which the
shares of Series One Preference Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any such shares or securities other than a payment
to the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
(4) In the event that a holder of shares of Series One Preference
Stock shall not by written notice designate the name in which shares of Common
Stock to be issued upon conversion of such shares should be registered or to
whom payment upon redemption of shares of Series One Preference Stock should be
made or the address to which the certificate or certificates representing such
shares, or such payment, should be sent, the Corporation shall be entitled to
register such shares, and make such payment, in the name of the holder of such
Series One Preference Stock as shown on the records of the Corporation and to
send the certificate or certificates representing such shares, or such payment,
to the address of such holder shown on the records of the Corporation.
(5) Unless otherwise provided in the Certificate of Incorporation,
as amended, of the Corporation, all payments in the form of dividends,
distributions on voluntary or involuntary dissolution, liquidation or winding-up
or otherwise made upon the shares of Series One Preference Stock and any other
stock ranking on a parity with the Series One Preference Stock with respect to
such dividend or distribution shall be made pro rata, so that amounts paid per
share on the Series One Preference Stock and such other stock shall in all cases
bear to each other the same ratio that the required dividends, distributions or
payments, as the case may be, then payable per share on the shares of the Series
One Preference Stock and such other stock bear to each other.
(6) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the Series One Preference Stock. Upon any such
appointment or discharge of a transfer agent, the Corporation shall send notice
thereof by first-class mail, postage prepaid, to each holder of record of Series
One Preference Stock.
FIFTH: (i) In addition to any affirmative vote required by law or
otherwise, the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of Voting Stock, voting together as a single class, held by
stockholders other than a Related Person shall be required for the approval,
authorization or effectuation directly or indirectly, of any Business
Combination with such Related Person (such affirmative vote being required
notwithstanding the fact that no vote may be required or that a lesser
percentage may be specified by law, this Certificate of Incorporation, any
resolution or resolutions adopted by the Board of Directors pursuant to this
Certificate of Incorporation, any agreement with any national securities
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<PAGE> 27
exchange or otherwise); provided, however, that such voting requirement shall
not be applicable if:
(1) The Continuing Directors, by at least 66 2/3% vote of such
Continuing Directors, have expressly approved such Business Combination either
in advance of or subsequent to such Related Person's having become a Related
Person; or
(2) All of the following conditions shall have been
satisfied:
(a) The Fair Market Value as of the date of consummation
of the Business Combination of the consideration to be received per
share by holders of shares of each class or series of Capital Stock
(regardless of whether or not such Related Person is the Beneficial
Owner of shares of any such class or series of Capital Stock) in the
Business Combination is not less than the Highest Per Share Price;
(b) The form of consideration to be received by holders
of shares of each class or series of Capital Stock in the Business
Combination shall be United States currency or the form of
consideration used by such Related Person in acquiring the largest
aggregate number of shares of the Capital Stock which such Related
Person has previously acquired;
(c) After such Related Person shall have first become a
Related person and prior to the consummation of such Business
Combination:
(x) Except as approved by at least 66 2/3% of the Continuing
Directors, there shall not have been any failure to declare
and pay at the regular dates therefor the full amount of all
dividends (whether or not cumulative) payable on the Preferred
Stock, the Preference Stock or any other class or series of
stock having a preference over the Common Stock as to
dividends or upon liquidation;
(y) There shall not have been (A) any reduction in the annual
rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock)
except as approved by at least 66 2/3% of the Continuing
Directors or (B) any failure to increase such annual rate of
dividends, to the extent necessary to prevent any such
reduction, in the event of any reclassification (including any
reverse stock split), recapitalization, reorganization or any
similar transaction that has the effect of reducing the number
of outstanding shares of Common Stock, unless the failure so
to increase such annual rate shall have been approved by at
least 66 2/3% of the Continuing Directors; and
(z) Such Related Person shall not have become the Beneficial
Owner of additional shares of Voting Stock, except as part of
the transaction that results in such Related Person becoming a
Related Person and except in a transaction that,
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giving effect thereto, would not result in any increase in the
percentage of Voting Stock of which such Related Person is the
Beneficial Owner; and
(d) A proxy statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations
thereunder, or any acts, rules or regulations that at least 66 2/3%
of the Continuing Directors determine are successors thereof, shall
(whether or not such a proxy statement is required to be mailed
pursuant to such acts, rules or regulations) have been mailed to all
holders of Voting Stock at least 30 days prior to the date of the
meeting called to consider such Business Combination and such
statement shall have contained, at the front thereof, in a prominent
place such recommendations and other information concerning the
Business Combination as at least 66 2/3% of the Continuing Directors
may determine so to include.
(ii) For purposes of this Article:
(1) The terms "Affiliate" and "Associate" shall have the same
meaning as in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended, as in effect on the date of this
Restated Certificate (the term "registrant" in said Rule 12b-2 meaning in this
case the Corporation), and shall include any Person that, giving effect to a
Business Combination, would become such an Affiliate or Associate.
(2) The term "Beneficial Owner" shall mean any Person which
beneficially owns any Capital Stock within the meaning ascribed in Rule 13d-3 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, as in effect on the date of this Restated Certificate, or who has the
right to acquire any such beneficial ownership (whether or not such right is
exercisable immediately, with the passage of time or subject to any condition)
pursuant to any agreement, contract, arrangement or understanding or upon the
exercise of any conversion, exchange or other right, warrant or option, or
otherwise. A Person shall be deemed the Beneficial Owner of all Capital Stock of
which any Affiliate or Associate of such Person is the Beneficial Owner.
(3) The term "Business Combination" shall mean (a) any merger or
consolidation of the Corporation or a Subsidiary with or into a Related Person,
(b) any sale, lease, exchange, transfer or other disposition, including without
limitation by way of a mortgage or any other security device, of any Substantial
Amount of the assets of the Corporation, one or more Subsidiaries or the
Corporation and one or more Subsidiaries to a Related Person, (c) the adoption
of any plan or proposal for the liquidation or dissolution of the Corporation
proposed by or on behalf of any Related Person, (d) any sale, lease, exchange,
transfer or other disposition, including without limitation by way of a mortgage
or any other security device, of any Substantial Amount of the assets of a
Related Person to the Corporation, one or more Subsidiaries, or the Corporation
and one or more Subsidiaries, (e) the issuance of any securities of the
Corporation, one or more Subsidiaries or the Corporation and one or more
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Subsidiaries to a Related Person or to a Person that giving effect thereto,
would be a Related Person other than the issuance on a pro rata basis to all
holders of stock of the same class pursuant to a stock split or stock dividend,
(f) any reclassification of securities, recapitalization of the Corporation, or
any merger or consolidation of the Corporation with or into one or more
Subsidiaries or any other transaction that would have the effect, directly or
indirectly, of increasing the voting power or other equity interest of a Related
Person in the Corporation, (g) any loan, advance, guaranty, pledge or other
financial assistance by the Corporation, one or more Subsidiaries or the
Corporation and one or more Subsidiaries to or for the benefit, directly or
indirectly (except proportionately as a stockholder), of a Related Person, (h)
any agreement, contract or other arrangement providing for any Business
Combination and (i) any series of transactions that a majority of Continuing
Directors determines are related and that, taken together, would constitute a
Business Combination.
(4) For the purposes of Section (i)(2) of this Article FIFTH, the
term "consideration to be received" shall include, without limitation, Capital
Stock of the Corporation retained by its existing stockholders other than
Related Persons in the event of a Business Combination that is a merger and in
which the Corporation is the surviving corporation.
(5) The term "Continuing Director" shall mean a Director of the
Corporation who is not the Related Person, or an Affiliate or Associate of the
Related Person (or a representative or nominee of the Related Person or such
Affiliate or Associate), that is involved in the relevant Business Combination
and (a) who was a member of the Board of Directors of the Corporation
immediately prior to the time that such Related Person became a Related Person
or (b) whose initial election as a Director of the Corporation was recommended
by the affirmative vote of a least 66 2/3% of the Continuing Directors then in
office, provided that, in either such case, such Continuing Director has
continued in office after becoming a Continuing Director.
(6) The term "Fair Market Value" shall mean (a) in the case of
United States currency, the amount thereof, (b) in the case of stock, (x) the
closing sale price per share thereof on the last trading day preceding the date
as of which the determination thereof is to be made, or the highest closing sale
price per share thereof during the specified period, on the Composite Tape for
New York Stock Exchange--Listed Stocks or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or if such stock is not listed
on such exchange, on the United States securities exchange registered as a
national securities exchange under the Securities Exchange Act of 1934, as
amended, on which such stock is listed or principally traded, (y) if such stock
is not so listed, the closing bid quotation per share thereof on the last
trading day preceding the date as of which the determination thereof is to be
made, or the highest closing bid quotation per share thereof during the
specified period, on the National Association of Securities Dealers Inc.
Automated Quotation System, or any system then in use or (z) if no such
quotations are then available, the fair market value thereof, as of the date of
which the determination thereof is to be made, as determined by at least 66 2/3%
of the Continuing Directors and (c) in the case of securities, property or
assets
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other than such currency or stock, the fair market value thereof, as of the date
of which the determination thereof is to be made, as determined by at least
66 2/3% of the Continuing Directors.
(7) The term "Highest Per Share Price" shall mean with respect to
any class or series of Capital Stock the highest of (a) the highest price per
share that can be determined to have been paid at any time by the Related Person
involved in the relevant Business Combination for any share or shares of such
class or series of Capital Stock, or if such Related Person has not acquired any
Capital Stock of such class or series, the highest equivalent, as determined by
at least 66 2/3% of the Continuing Directors for a share of such class or series
of such highest price for any other class or series of Capital Stock, (b) the
highest preferential amount, if any, per share payable with respect to shares of
such class or series of Capital Stock in the event of a voluntary or involuntary
liquidation of the Corporation, or the highest redemption price, if any, to
which the holders of shares of such class or series of Capital Stock would be
entitled, whichever is higher, and (c) the Fair Market Value per share of such
Capital Stock during the period of twenty (20) trading days immediately
preceding the time the relevant Business Combination is first publicly
announced, or during the period of twenty (20) trading days immediately
preceding the time at which the Related Person became a Related Person,
whichever is higher. In determining the Highest Per Share Price, (x) all
purchases by the Related Person shall be taken into account regardless of
whether the shares were purchased before or after the Related Person became a
Related Person and (y) the Highest Per Share Price shall include any brokerage
commissions, transfer taxes and soliciting dealers' fees or other value paid in
connection with such purchases.
A Related Person shall be deemed to have acquired a share of Capital Stock at
the time when such Related Person became the Beneficial Owner thereof. The price
deemed to have been paid by a Related Person for Capital Stock of which an
Affiliate or Associate is the Beneficial Owner shall be the price that is the
highest of (a) the price paid upon the acquisition thereof by the relevant
Affiliate or Associate (if any, and whether or not such Affiliate or Associate
was an Affiliate or Associate at the time of such acquisition), and (b) the Fair
Market Value per share of such Capital Stock during the period of 20 trading
days immediately preceding the time when the Related Person became the
Beneficial Owner thereof.
In any determination of the price or prices paid or deemed to have been paid by
any Person, and in any determination of the Highest Per Share Price or Fair
Market Value, appropriate adjustment shall be made to reflect the relevant
effect of any stock dividends, splits and distributions and any combination or
reclassification of Capital Stock.
(8) The Term "Related Person" shall mean (a) any Person (other than
the Corporation or any wholly owned Subsidiary) that, alone or together with any
Affiliates and Associates, is or becomes the Beneficial Owner of an aggregate of
10% or more of the outstanding Voting Stock, and (b) any Affiliate or Associate
of any such Person, provided, however, that the term "Related Person" shall not
include (x) a Person whose acquisition of such aggregate
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percentage of Voting Stock was approved in advance by at least 66 2/3% of the
Continuing Directors or (y) any pension, profit sharing, employee stock
ownership or other employee benefit plan of the Corporation or any Subsidiary,
all of the capital stock of or equity interest in which Subsidiary is owned by
the Corporation, one or more Subsidiaries or the Corporation and one or more
Subsidiaries, or any trustee or fiduciary when acting in such capacity with
respect to any such plan. The term "Person" shall mean any individual,
corporation, partnership or other entity, including, any group comprised of any
person and any other Person, or any Affiliate or Associate thereof, with whom
such Person, or any Affiliate or Associate thereof, has any agreement,
arrangement or understanding, directly or indirectly, for the purpose of
acquiring, holding, voting or disposing of Voting Stock and each Person, and any
Affiliate or Associate thereof, that is a member of such group.
(9) The term "Subsidiary" shall mean any Person a majority of the
capital stock of or other equity interest in which is owned by the Corporation,
one or more Subsidiaries or the Corporation and one or more Subsidiaries.
(10) The term "Substantial Amount" shall mean an amount of stock,
securities or other property having a Fair Market Value equal to 10% or more of
the Fair Market Value of the total consolidated assets of the Corporation and
its Subsidiaries taken as a whole, as of the end of the Corporation's most
recent fiscal year ended prior to the time as of which the determination is
being made.
(11) The term "Voting Stock" shall mean all outstanding Common Stock
and all other outstanding Capital Stock of the Corporation, if any, entitled to
vote on each matter on which the holders of record of Common Stock shall be
entitled to vote, and each reference to a proportion of shares of Voting Stock
shall refer to such proportion of the votes entitled to be cast by the holders
of such Common Stock and other Capital Stock, if any, and the term "Capital
Stock" shall mean all outstanding capital stock of the Corporation issued
pursuant to this Certificate of Incorporation or any resolution or resolutions
of the Board of Directors of the Corporation adopted pursuant to this
Certificate of Incorporation.
(12) The Continuing Directors by at least a 66 2/3% vote, shall have
the power to make any and all determinations provided for in this Article FIFTH
and to interpret the provisions and definitions in this Article FIFTH, which
determinations and interpretations shall, to the fullest extent permitted by
law, be conclusive.
(iii) In addition to the requirements of law and any other
provisions of this Certificate of Incorporation or any resolution or resolutions
of the Board of Directors adopted pursuant to this Certificate of Incorporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
this Certificate of Incorporation, any such resolution or resolutions or
otherwise), the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of Voting Stock held by stockholders other than any Related
Person
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shall be required to amend, alter or repeal, or adopt any provision inconsistent
with the provisions of this Article FIFTH.
SIXTH: The number of directors of the Corporation shall not be
less than three nor more than eighteen, as determined by action of the Board of
Directors.
SEVENTH: (i) A director of the Corporation shall not be liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director to the fullest extent permitted by Delaware Law.
(ii)(1) Each person (and the heirs, executors or
administrators of such person) who was or is a party or is threatened to be made
a party to, or is involved in any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified and held harmless by the Corporation to the
fullest extent permitted by Delaware Law. The right to indemnification conferred
in this ARTICLE SEVENTH shall also include the right to be paid by the
Corporation the expenses incurred in connection with any such proceeding in
advance of its final disposition to the fullest extent authorized by Delaware
Law. The right to indemnification conferred in this ARTICLE SEVENTH shall be a
contract right.
(2) The Corporation may, by action of its Board of Directors,
provide indemnification to such of the employees and agents of the Corporation
to such extent and to such effect as the Board of Directors shall determine to
be appropriate and authorized by Delaware Law.
(iii) The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss incurred by such person in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under Delaware Law.
(iv) The rights and authority conferred in this ARTICLE
SEVENTH shall not be exclusive of any other right which any person may otherwise
have or hereafter acquire.
(v) Neither the amendment nor repeal of this ARTICLE SEVENTH,
nor the adoption of any provision of this Certificate of Incorporation or the
bylaws of the Corporation, nor, to the fullest extent permitted by Delaware Law,
any modification of law, shall eliminate or reduce the effect of this ARTICLE
SEVENTH in respect of any acts or omissions occurring prior to such amendment,
repeal, adoption or modification.
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EIGHTH: 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 holders of all outstanding shares entitled to
vote thereon. Written consent thus given by the holders of all outstanding
shares entitled to vote shall have the same effect as a unanimous vote of
stockholders.
NINTH: Special meetings of the stockholders may be called by
the Board of Directors, the Chairman of the Board of Directors or the President
of the Corporation and may not be called by any other person. Notwithstanding
the foregoing, whenever holders of one or more classes or series of Preferred
Stock or Preference Stock shall have the right, voting separately as a class or
series, to elect directors, such holders may call, to the extent provided in
Article FOURTH (or pursuant to the terms of the resolution or resolutions
adopted by the Board of Directors pursuant to ARTICLE FOURTH hereof), special
meetings of holders of such Preferred Stock or Preference Stock.
TENTH: The Corporation's bylaws or any of them, may be
altered, amended or repealed, or new bylaws may be made, by the stockholders
entitled to vote thereon at any annual or special meeting thereof or by the
Board of Directors.
ELEVENTH: The Corporation reserves the right to amend this
Certificate of Incorporation in any manner permitted by Delaware Law and, with
the sole exception of those rights and powers conferred under the above ARTICLE
SEVENTH, all rights and powers conferred herein on stockholders, directors and
officers, if any, are subject to this reserved power.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate to be executed by its Chief Executive Officer and attested by its
Secretary on this 15th day of November, 1996.
CVS Corporation
By: /s/ Stanley P. Goldstein
--------------------------------
Name: Stanley P. Goldstein
Title: Chairman of the Board and
Chief Executive Officer
Attest: /s/ Zenon Lankowsky
-----------------------------
Name: Zenon Lankowsky
Secretary: Secretary
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EXHIBIT 3.2
BY-LAWS
OF
CVS CORPORATION
------------------------------------
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, New York 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
President 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 President (or a Vice-
President or the Secretary or an Assistant Secretary, in each case acting at the
direction of the Chairman or the President) 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
<PAGE> 2
to that effect. If the notice is mailed, it shall be directed to a stockholder
at his address as it appears on the record of stockholders unless he shall have
filed with the Secretary of the corporation a written request that notices
intended for him 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 him.
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 President or, in his absence, 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.
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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 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 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.
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<PAGE> 4
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.
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 him at his 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 President 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
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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.
At all meetings of the Board of Directors, the Chairman of the Board
of Directors, or in his absence, the President, or in the absence of both, the
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 a Chairman of the Board, of
the executive officers of the corporation 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.
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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.
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.
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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.
(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 the Chairman of the Board of Directors and a Vice Chairman,
each of whom shall be a member of the Board of Directors, and may include a
President, such number of Executive Vice Presidents, Senior Vice Presidents
and/or Vice Presidents, a Controller, a Treasurer and/or a Secretary, as the
Board of Directors shall determine, all of whom shall be chosen by the Board of
Directors.
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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.
One person may hold more than one of the above offices except the
offices of President and Secretary.
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 OF DIRECTORS. The Chairman of the
Board of Directors shall be the chief executive officer of the corporation. He
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 preside at meetings of the Board of Directors and of the
stockholders.
Section 3. VICE CHAIRMAN. The Vice Chairman shall have such
authority and perform such duties as the Board of Directors, the Executive
Committee, or the Chairman of the Board of Directors may from time to time
determine. In the event that at any time no President of the Corporation is in
office, all powers of the President shall vest in the Vice Chairman and the Vice
Chairman may exercise all powers of the President set forth in these by-laws.
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 Chairman of the Board of Directors may from time to time
determine. He shall exercise the powers of the Chairman of the Board of
Directors during his absence or inability to act.
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 Chairman of the Board of Directors 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 Chairman of the Board of
Directors or the President exercise the powers of the Chairman of the Board of
Directors during the absence or inability to act of the Chairman of the Board of
Directors and the President.
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<PAGE> 9
Section 6. PRINCIPAL FINANCIAL OFFICER. An 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 Chairman of the Board of Directors or
the President.
Section 7. PRINCIPAL ACCOUNTING OFFICER. A Controller or other
officer designated by the Board of Directors shall be the principal accounting
officer and subject to the direction of the principal 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 principal financial officer, and
shall exercise the powers of the principal 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 instruments and obligations and shall deposit the same to the
credit of the corporation in such bank or banks or depositaries 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 Chairman of the Board of Directors, the President and
the principal 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
Chairman of the Board of Directors, the President or the principal 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 Chairman of the Board of Directors, the President or the principal 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
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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 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 Board of Directors 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 Chairman of the Board of
Directors 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
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
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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, the
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.
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.
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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.
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 bylaws may be made by the stockholders entitled to vote thereon
at any annual or special meeting thereof or by the Board of Directors.
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<PAGE> 1
Exhibit 10(iii)(A)(X)
CVS CORPORATION
- ------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT FOR ____________
- ------------------------------------------------------------------------------
<PAGE> 2
CVS CORPORATION
- ------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT FOR ___________
- ------------------------------------------------------------------------------
PAGE
----
1. Definitions........................................................1
2. Term of Employment.................................................2
3. Position, Duties and Responsibilities..............................2
4. Base Salary........................................................3
5. Annual Incentive Awards............................................3
6. Long-Term Stock Incentive Programs.................................3
7. Employee Benefit Programs..........................................3
8. Disability.........................................................4
9. Reimbursement of Business and Other Expenses.......................5
10. Termination of Employment..........................................5
11 Confidentiality; Cooperation with Regard to Litigation;
Non-disparagement.................................................14
12. Non-competition...................................................16
13. Non-solicitation .................................................17
14. Remedies..........................................................17
15. Resolution of Disputes............................................17
16. Indemnification...................................................18
17. Excise Tax Gross-Up...............................................19
18. Effect of Agreement on Other Benefits.............................20
19. Assignability; Binding Nature.....................................21
20. Representation....................................................21
21. Entire Agreement..................................................21
22. Amendment or Waiver...............................................21
23. Severability......................................................21
24. Survivorship......................................................22
25. Beneficiaries/References..........................................22
<PAGE> 3
PAGE
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26. Governing Law/Jurisdiction........................................22
27. Notices...........................................................23
28. Headings..........................................................23
29. Counterparts......................................................23
<PAGE> 4
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the ___ day of ___________, ____ by
and between CVS Corporation, a Delaware corporation (together with its
successors and assigns, the "Company"), and ______________ (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires to employ the Executive pursuant to an
agreement embodying the terms of such employment (this "Agreement") and the
Executive desires to enter into this Agreement and to accept such employment,
subject to the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. DEFINITIONS.
-----------
(a) "Approved Early Retirement" shall have the meaning set forth
in Section 10(f) below.
(b) "Base Salary" shall have the meaning set forth in Section 4
below.
(c) "Board" shall have the meaning set forth in Section 3(a)
below.
(d) "Cause" shall have the meaning set forth in Section 10(b)
below.
(e) "Change in Control" shall have the meaning set forth in
Section 10(c) below.
(f) "Committee" shall have the meaning set forth in Section 4
below.
(g) "Confidential Information" shall have the meaning set forth in
Section 11(c) below.
(h) "Constructive Termination Without Cause" shall have the
meaning set forth in Section 10(c) below.
(i) "Effective Date" shall have the meaning set forth in Section
2(a) below.
(j) "Normal Retirement" shall have the meaning set forth in
Section 10(f) below.
(k) "Original Term of Employment" shall have the meaning set forth
in Section 2(a) below.
(l) "Renewal Term" shall have the meaning set forth in Section
2(a) below.
(m) "Restriction Period" shall have the meaning set forth in
Section 12(b) below.
<PAGE> 5
(n) "Severance Period" shall have the meaning set forth in Section
10(c)(ii) below, except as provided otherwise in Section 10(e)
below.
(o) "Subsidiary" shall have the meaning set forth in Section 11(d)
below.
(p) "Term of Employment" shall have the meaning set forth in
Section 2(a) below.
(q) "Termination Without Cause" shall have the meaning set forth
in Section 10(c) below.
2. TERM OF EMPLOYMENT.
------------------
(a) The term of the Executive's employment under this Agreement
shall commence on the date of this Agreement (the "Effective Date") and end on
the third anniversary of such date (the "Original Term of Employment"), unless
terminated earlier in accordance herewith. The Original Term of Employment shall
be automatically renewed for successive one-year terms (the "Renewal Terms")
unless at least 180 days prior to the expiration of the Original Term of
Employment or any Renewal Term, either Party notifies the other Party in writing
that he or it is electing to terminate this Agreement at the expiration of the
then current Term of Employment. "Term of Employment" shall mean the Original
Term of Employment and all Renewal Terms. If a Change in Control shall have
occurred during the Term of Employment, notwithstanding any other provision of
this Section 2(a), the Term of Employment shall not expire earlier than two
years after such Change in Control.
(b) Notwithstanding anything in this Agreement to the contrary, at
least one year prior to the expiration of the Original Term of Employment, upon
the written request of the Company or the Executive, the Parties shall meet to
discuss this Agreement and may agree in writing to modify any of the terms of
this Agreement.
3. POSITION, DUTIES AND RESPONSIBILITIES.
-------------------------------------
(a) GENERALLY. Executive shall serve as a senior officer of the
Company. Executive shall have and perform such duties, responsibilities, and
authorities as shall be specified by the Company from time to time and as are
customary for a senior officer of a publicly held corporation of the size, type,
and nature of the Company as they may exist from time to time and as are
consistent with such position and status. Executive shall devote substantially
all of his business time and attention (except for periods of vacation or
absence due to illness), and his best efforts, abilities, experience, and talent
to his position and the businesses of the Company.
(b) OTHER ACTIVITIES. Anything herein to the contrary
notwithstanding, nothing in this Agreement shall preclude the Executive from (i)
serving on the boards of directors of a reasonable number of other corporations
or the boards of a reasonable number of trade associations and/or charitable
organizations, (ii) engaging in charitable activities and community affairs, and
(iii) managing his personal investments and affairs, provided that such
activities do not materially interfere with the proper performance of his duties
and responsibilities under this Agreement.
(c) PLACE OF EMPLOYMENT. Executive's principal place of employment
shall be the corporate offices of the Company.
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<PAGE> 6
4. BASE SALARY.
-----------
The Executive shall be paid an annualized salary ("Base Salary"),
payable in accordance with the regular payroll practices of the Company, of not
less than $_______, subject to review for increase at the discretion of the
Compensation Committee (the "Committee") of the Company's Board of Directors
(the "Board").
5. ANNUAL INCENTIVE AWARDS.
-----------------------
The Executive shall participate in the Company's annual incentive
compensation plan with a target annual incentive award opportunity of no less
than ___% of Base Salary. Payment of annual incentive awards shall be made at
the same time that other senior-level executives receive their incentive awards.
6. LONG-TERM INCENTIVE PROGRAMS.
----------------------------
The Executive shall be eligible to participate in the Company's
long-term incentive compensation programs (including stock options and stock
grants).
7. EMPLOYEE BENEFIT PROGRAMS.
-------------------------
(a) GENERAL BENEFITS. During the Term of Employment, the Executive
shall be entitled to participate in such employee pension and welfare benefit
plans and programs of the Company as are made available to the Company's
senior-level executives or to its employees generally, as such plans or programs
may be in effect from time to time, including, without limitation, health,
medical, dental, long-term disability, travel accident and life insurance plans.
(b) DEFERRAL OF COMPENSATION. The Company shall implement deferral
arrangements, reasonably acceptable to Executive and the Company, permitting
Executive to elect to defer receipt, pursuant to written deferral election terms
and forms (the "Deferral Election Forms"), of all or a specified portion of (i)
his annual Base Salary and annual incentive compensation under Sections 4 and 5,
(ii) long term incentive compensation under Section 6 and (iii) shares acquired
upon exercise of options to purchase Company common stock that are acquired in
an exercise in which Executive pays the exercise price by the surrender of
previously acquired shares, to the extent of the net additional shares otherwise
issuable to Executive in such exercise; PROVIDED, HOWEVER, that such deferrals
shall not reduce Executive's total cash compensation in any calendar year below
the sum of (i) the FICA maximum taxable wage base plus (ii) the amount needed,
on an after-tax basis, to enable Executive to pay the 1.45% medicare tax imposed
on his wages in excess of such FICA maximum taxable wage base.
In accordance with such duly executed Deferral Election Forms, the
Company shall credit to a bookkeeping account (the "Deferred Compensation
Account") maintained for Executive on the respective payment date or dates,
amounts equal to the compensation subject to deferral, such credits to be
denominated in cash if the compensation would have been paid in cash but for the
deferral or in shares if the compensation would have been paid in shares but for
the deferral. An amount of cash equal in value to all cash-denominated amounts
credited to Executive's account and a number of shares of Company common stock
equal to the number of shares credited to Executive's account pursuant to this
Section 7(b) shall be transferred as soon as practicable following such
crediting by the Company to, and shall be held and invested by, an independent
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<PAGE> 7
trustee selected by the Company and reasonably acceptable to Executive (a
"Trustee") pursuant to a "rabbi trust" established by the Company in connection
with such deferral arrangement and as to which the Trustee shall make
investments based on Executive's investment objectives (including possible
investment in publicly traded stocks and bonds, mutual funds, and insurance
vehicles). Thereafter, Executive's deferral accounts will be valued by reference
to the value of the assets of the "rabbi trust". The Company shall pay all costs
of administration or maintenance of the deferral arrangement, without deduction
or reimbursement from the assets of the "rabbi trust."
Except as otherwise provided under Section 10, in the event of
Executive's termination of employment with the Company or as otherwise
determined by the Committee in the event of hardship on the part of Executive,
upon such date(s) or event(s) set forth in the Deferral Election Forms
(including forms filed after deferral but before settlement in which Executive
may elect to further defer settlement), the Company shall promptly pay to
Executive cash equal to the value of the assets then credited to Executive's
deferral accounts, less applicable withholding taxes, and such distribution
shall be deemed to fully settle such accounts; PROVIDED, HOWEVER, that the
Company may instead settle such accounts by directing the Trustee to distribute
Company common stock and/or other assets of the "rabbi trust." The Company and
Executive agree that compensation deferred pursuant to this Section 7(b) shall
be fully vested and nonforfeitable; HOWEVER, Executive acknowledges that his
rights to the deferred compensation provided for in this Section 7(b) shall be
no greater than those of a general unsecured creditor of the Company, and that
such rights may not be pledged, collateralized, encumbered, hypothecated, or
liable for or subject to any lien, obligation, or liability of Executive, or be
assignable or transferable by Executive, otherwise than by will or the laws of
descent and distribution, provided that Executive may designate one or more
beneficiaries to receive any payment of such amounts in the event of his death.
8. DISABILITY.
----------
(a) During the Term of Employment, as well as during the Severance
Period, the Executive shall be entitled to disability coverage as described in
this Section 8(a). In the event the Executive becomes disabled, as that term is
defined under the Company's Long-Term Disability Plan, the Executive shall be
entitled to receive pursuant to the Company's Long-Term Disability Plan or
otherwise, and in place of his Base Salary, an amount equal to 60% of his Base
Salary, at the annual rate in effect on the commencement date of his eligibility
for the Company's long-term disability benefits ("Commencement Date") for a
period beginning on the Commencement Date and ending with the earlier to occur
of (A) the Executive's attainment of age 65 or (B) the Executive's commencement
of retirement benefits from the Company in accordance with Section 10(f) below.
If (i) the Executive ceases to be disabled during the Term of Employment (as
determined in accordance with the terms of the Long-Term Disability Plan), (ii)
his position or another senior executive position is then vacant and (iii) the
Company requests in writing that he resume such position, he may elect to resume
such position by written notice to the Company within 15 days after the Company
delivers its request. If he resumes such position, he shall thereafter be
entitled to his Base Salary at the annual rate in effect on the Commencement
Date and, for the year he resumes his position, a pro rata annual incentive
award. If he ceases to be disabled during the Term of Employment and does not
resume his position in accordance with the preceding sentence, he shall be
treated as if he voluntarily terminated his employment pursuant to Section 10(d)
as of the date the Executive ceases to be disabled. If the Executive is not
offered his position or another senior executive position after he ceases to be
disabled during the Term of Employment, he shall be treated as if his employment
was terminated Without Cause pursuant to Section 10(c) as of the date the
Executive ceases to be disabled; PROVIDED, HOWEVER, that if a Change in Control
shall have
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<PAGE> 8
occurred during the period of the Executive's disability, he shall be treated as
if his employment was terminated Without Cause following a Change in Control
pursuant to Section 10(e) as of the date the Executive ceases to be disabled.
(b) The Executive shall be entitled to a pro rata annual incentive
award for the year in which the Commencement Date occurs based on ___% of Base
Salary paid to him during such year prior to the Commencement Date, payable in a
lump sum not later than 15 days after the Commencement Date. The Executive shall
not be entitled to any annual incentive award with respect to the period
following the Commencement Date. If the Executive recommences his position in
accordance with Section 8(a), he shall be entitled to a pro rata annual
incentive award for the year he resumes such position and shall thereafter be
entitled to annual incentive awards in accordance with Section 5 hereof.
(c) During the period the Executive is receiving disability
benefits pursuant to Section 8(a) above, he shall continue to be treated as an
employee for purposes of all employee benefits and entitlements in which he was
participating on the Commencement Date, including without limitation, the
benefits and entitlements referred to in Sections 6 and 7 above, except that the
Executive shall not be entitled to receive any annual salary increases or any
new long-term incentive plan grants following the Commencement Date.
9. REIMBURSEMENT OF BUSINESS AND OTHER EXPENSES.
--------------------------------------------
The Executive is authorized to incur reasonable expenses in carrying
out his duties and responsibilities under this Agreement, and the Company shall
promptly reimburse him for all business expenses incurred in connection
therewith, subject to documentation in accordance with the Company's policy.
During the Term of Employment, the Company shall reimburse the Executive, upon
demand, for out-of-pocket expenses incurred in connection with personal
financial and tax planning up to a maximum of $______ per annum. The Company
shall pay or reimburse the Executive for the expenses (including, without
limitation, reasonable attorneys' fees and expenses) incurred by him in
conjunction with preparation and negotiation of this Agreement and any related
documents up to a maximum of $______.
10. TERMINATION OF EMPLOYMENT.
-------------------------
(a) TERMINATION DUE TO DEATH. In the event the Executive's
employment with the Company is terminated due to his death, his estate or his
beneficiaries, as the case may be, shall be entitled to and their sole remedies
under this Agreement shall be:
(i) Base Salary through the date of death, which shall be
paid in a cash lump sum not later than 15 days following
the Executive's death;
(ii) pro rata annual incentive award for the year in which
the Executive's death occurs assuming that the Executive
would have received an award equal to ___% of Base
Salary for such year, which shall be payable in a cash
lump sum promptly (but in no event later than 15 days)
after his death;
(iii) elimination of all restrictions on any restricted or
deferred stock awards outstanding at the time of his
death (other than awards
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<PAGE> 9
under the Company's Partnership Equity Program, which
shall be governed by the terms of such awards);
(iv) immediate vesting of all outstanding stock options and
the right to exercise such stock options for a period of
one year following death or for the remainder of the
exercise period, if less (other than awards under the
Company's Partnership Equity Program, which shall be
governed by the terms of such awards);
(v) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which
shall be paid in a cash lump sum not later than 15 days
following the Executive's death;
(vi) settlement of all deferred compensation arrangements in
accordance with any then applicable deferred
compensation plan or election form; and
(vii) other or additional benefits then due or earned in
accordance with applicable plans and programs of the
Company.
(b) TERMINATION BY THE COMPANY FOR CAUSE.
------------------------------------
(i) "Cause" shall mean:
(A) the Executive's willful and material breach of
Sections 11, 12 or 13 of this Agreement;
(B) the Executive is convicted of a felony involving
moral turpitude; or
(C) the Executive engages in conduct that constitutes
willful gross neglect or willful gross misconduct
in carrying out his duties under this Agreement,
resulting, in either case, in material harm to the
financial condition or reputation of the Company.
For purposes of this Agreement, an act or failure to act on Executive's part
shall be considered "willful" if it was done or omitted to be done by him not in
good faith, and shall not include any act or failure to act resulting from any
incapacity of Executive.
(ii) A termination for Cause shall not take effect unless the
provisions of this paragraph (ii) are complied with. The
Executive shall be given written notice by the Company
of its intention to terminate him for Cause, such notice
(A) to state in detail the particular act or acts or
failure or failures to act that constitute the grounds
on which the proposed termination for Cause is based and
(B) to be given within 90 days of the Company's learning
of such act or acts or failure or failures to act. The
Executive shall have 20 days after the date that such
written notice has been given to him in which to cure
such conduct, to the extent such cure is possible. If he
fails to cure such
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<PAGE> 10
conduct, the Executive shall then be entitled to a
hearing before the Committee of the Board at which the
Executive is entitled to appear. Such hearing shall be
held within 25 days of such notice to the Executive,
provided he requests such hearing within 10 days of the
written notice from the Company of the intention to
terminate him for Cause. If, within five days following
such hearing, the Executive is furnished written notice
by the Board confirming that, in its judgment, grounds
for Cause on the basis of the original notice exist, he
shall thereupon be terminated for Cause.
(iii) In the event the Company terminates the Executive's
employment for Cause, he shall be entitled to and his
sole remedies under this Agreement shall be:
(A) Base Salary through the date of the termination of
his employment for Cause, which shall be paid in a
cash lump sum not later than 15 days following the
Executive's termination of employment;
(B) any incentive awards earned as of December 31 of
the prior year (but not yet paid), which shall be
paid in a cash lump sum not later than 15 days
following the Executive's termination of
employment;
(C) settlement of all deferred compensation
arrangements in accordance with any then
applicable deferred compensation plan or election
form; and
(D) other or additional benefits then due or earned in
accordance with applicable plans or programs of
the Company.
(c) TERMINATION WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION WITHOUT
CAUSE PRIOR TO CHANGE IN CONTROL. In the event the Executive's employment with
the Company is terminated without Cause (which termination shall be effective as
of the date specified by the Company in a written notice to the Executive),
other than due to death, or in the event there is a Constructive Termination
Without Cause (as defined below), in either case prior to a Change in Control
(as defined below) the Executive shall be entitled to and his sole remedies
under this Agreement shall be:
(i) Base Salary through the date of termination of the
Executive's employment, which shall be paid in a cash
lump sum not later than 15 days following the
Executive's termination of employment;
(ii) Base Salary, at the annualized rate in effect on the
date of termination of the Executive's employment (or in
the event a reduction in Base Salary is a basis for a
Constructive Termination Without Cause, then the Base
Salary in effect immediately prior to such reduction),
for a period of 24 months (the "Severance Period");
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<PAGE> 11
(iii) pro rata annual incentive award for the year in which
termination occurs equal to ___% of Base Salary
(determined in accordance with Section 10(c)(ii) above)
for such year, payable in a cash lump sum promptly (but
in no event later than 15 days) following termination;
(iv) an amount equal to ___% of Base Salary (determined in
accordance with Section 10(c)(ii) above) multiplied by
two, payable in equal monthly payments over the
Severance Period;
(v) elimination of all restrictions on any restricted or
deferred stock awards granted to the Executive in
connection with the CVS Corporation Special Incentive
Plan for 1995 or 1996 performance;
(vi) immediate vesting of all outstanding stock options
granted to the Executive on May 14, 1996, and the right
to exercise such stock options during the Severance
Period or for the remainder of the exercise period, if
less;
(vii) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which
shall be paid in a cash lump sum not later than 15 days
following the Executive's termination of employment;
(viii)settlement of all deferred compensation arrangements in
accordance with any then applicable deferred
compensation plan or election form;
(ix) continued participation in all medical, health and life
insurance plans at the same benefit level at which he
was participating on the date of the termination of his
employment until the earlier of:
(A) the end of the Severance Period; or
(B) the date, or dates, he receives equivalent
coverage and benefits under the plans and programs
of a subsequent employer (such coverage and
benefits to be determined on a
coverage-by-coverage, or benefit-by-benefit,
basis); provided that (1) if the Executive is
precluded from continuing his participation in any
employee benefit plan or program as provided in
this clause (ix) of this Section 10(c), he shall
receive cash payments equal on an after-tax basis
to the cost to him of obtaining the benefits
provided under the plan or program in which he is
unable to participate for the period specified in
this clause (ix) of this Section 10(c), (2) such
cost shall be deemed to be the lowest reasonable
cost that would be incurred by the Executive in
obtaining such benefit himself on an individual
basis, and (3) payment of such amounts shall be
made quarterly in advance; and
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<PAGE> 12
(x) other or additional benefits then due or earned in
accordance with applicable plans and programs of the
Company.
"Termination Without Cause" shall mean the Executive's employment is
terminated by the Company for any reason other than Cause (as defined in Section
10(b)) or due to death.
"Constructive Termination Without Cause" shall mean a termination of
the Executive's employment at his initiative as provided in this Section 10(c)
following the occurrence, without the Executive's written consent, of one or
more of the following events (except as a result of a prior termination):
(A) an assignment of any duties to Executive which are
inconsistent with his status as a senior officer
of the Company;
(B) a decrease in Executive's annual Base Salary or
target annual incentive award opportunity below
50% of Base Salary;
(C) any other failure by the Company to perform any
material obligation under, or breach by the
Company of any material provision of, this
Agreement that is not cured within 30 days; or
(D) any failure to secure the agreement of any
successor corporation or other entity to the
Company to fully assume the Company's obligations
under this Agreement.
In addition, following a Change in Control, "Constructive Termination Without
Cause" shall also mean a termination of the Executive's employment at his
initiative as provided in this Section 10(c) following the occurrence, without
the Executive's written consent, of (i) a relocation of his principal place of
employment outside a 35-mile radius of his principal place of employment as in
effect immediately prior to such Change in Control or (ii) a material diminution
or change, adverse to Executive, in Executive's positions, titles, offices,
status, rank, nature of responsibility, or authority within the Company, as in
effect immediately prior to such Change in Control, or a removal of Executive
from or any failure to elect or re-elect, or as the case may be, nominate
Executive to any such positions or offices.
A "Change in Control" shall be deemed to have occurred if:
(i) any Person (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit
plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company
immediately prior to the occurrence with respect to
which the evaluation is being made in substantially the
same proportions as their ownership of the common stock
of the Company) becomes the Beneficial Owner (except
that a Person shall be deemed to be the Beneficial Owner
of all shares that any such Person has the right to
acquire pursuant to any agreement or arrangement or upon
exercise of conversion rights,
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<PAGE> 13
warrants or options or otherwise, without regard to the
sixty day period referred to in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of
the Company or any Significant Subsidiary (as defined
below), representing 25% or more of the combined voting
power of the Company's or such subsidiary's then
outstanding securities;
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the
Board, and any new director (other than a director
designated by a person who has entered into an agreement
with the Company to effect a transaction described in
clause (i), (iii), or (iv) of this paragraph) whose
election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at
least two- thirds of the directors then still in office
who either were directors at the beginning of the
two-year period or whose election or nomination for
election was previously so approved but excluding for
this purpose any such new director whose initial
assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of
an individual, corporation, partnership, group,
associate or other entity or Person other than the
Board, cease for any reason to constitute at least a
majority of the Board;
(iii) the consummation of a merger or consolidation of the
Company or any subsidiary owning directly or indirectly
all or substantially all of the consolidated assets of
the Company (a "Significant Subsidiary") with any other
entity, other than a merger or consolidation which would
result in the voting securities of the Company or a
Significant Subsidiary outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities
of the surviving or resulting entity) more than 50% of
the combined voting power of the surviving or resulting
entity outstanding immediately after such merger or
consolidation;
(iv) the stockholders of the Company approve a plan or
agreement for the sale or disposition of all or
substantially all of the consolidated assets of the
Company (other than such a sale or disposition
immediately after which such assets will be owned
directly or indirectly by the stockholders of the
Company in substantially the same proportions as their
ownership of the common stock of the Company immediately
prior to such sale or disposition) in which case the
Board shall determine the effective date of the Change
in Control resulting therefrom; or
(v) any other event occurs which the Board determines, in
its discretion, would materially alter the structure of
the Company or its ownership.
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<PAGE> 14
For purposes of this definition:
(A) 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).
(B) The term "Exchange Act" means the Securities
Exchange Act of 1934, as amended from time to
time, or any successor act thereto.
(C) 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,
including "group" as defined in Section 13(d)
thereof.
(d) VOLUNTARY TERMINATION. In the event of a termination of
employment by the Executive on his own initiative after delivery of 10 business
days advance written notice, other than a termination due to death, a
Constructive Termination Without Cause, or Approved Early Retirement or Normal
Retirement pursuant to Section 10(f) below, the Executive shall have the same
entitlements as provided in Section 10(b)(iii) above for a termination for
Cause, provided that at the Company's election, furnished in writing to the
Executive within 15 days following such notice of termination, the Company shall
in addition pay the Executive 50% of his Base Salary for a period of 18 months
following such termination in exchange for the Executive not engaging in
competition with the Company or any Subsidiary as set forth in Section 12(a)
below. Notwithstanding any implication to the contrary, the Executive shall not
have the right to terminate his employment with the Company during the Term of
Employment except in the event of a Constructive Termination Without Cause,
Approved Early Retirement, or Normal Retirement, and any voluntary termination
of employment during the Term of Employment in violation of this Agreement shall
be considered a material breach.
(e) TERMINATION WITHOUT CAUSE; CONSTRUCTIVE TERMINATION WITHOUT
CAUSE OR VOLUNTARY TERMINATION FOLLOWING CHANGE IN CONTROL. In the event the
Executive's employment with the Company is terminated by the Company without
Cause (which termination shall be effective as of the date specified by the
Company in a written notice to the Executive), other than due to death, or in
the event there is a Constructive Termination Without Cause (as defined above),
in either case within two years following a Change in Control (as defined
above), the Executive shall be entitled to and his sole remedies under this
Agreement shall be:
(i) Base Salary through the date of termination of the
Executive's employment, which shall be paid in a cash
lump sum not later than 15 days following the
Executive's termination of employment;
(ii) an amount equal to three times the Executive's Base
Salary, at the annualized rate in effect on the date of
termination of the Executive's employment (or in the
event a reduction in Base Salary is a basis for a
Constructive Termination Without Cause, then the Base
Salary in effect immediately prior to such reduction),
payable in a cash lump sum promptly (but in no event
later than 15 days) following the Executive's
termination of employment;
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<PAGE> 15
(iii) pro rata annual incentive award for the year in which
termination occurs assuming that the Executive would
have received an award equal to ___% of Base Salary
(determined in accordance with Section 10(e)(ii) above)
for such year, payable in a cash lump sum promptly (but
in no event later than 15 days) following the
Executive's termination of employment;
(iv) an amount equal to ___% of such Base Salary (determined
in accordance with Section 10(e)(ii) above) multiplied
by three, payable in a cash lump sum promptly (but in no
event later than 15 days) following the Executive's
termination of employment;
(v) elimination of all restrictions on any restricted or
deferred stock awards outstanding at the time of
termination of employment (other than awards under the
Company's Partnership Equity Program, which shall be
governed by the terms of such awards);
(vi) immediate vesting of all outstanding stock options and
the right to exercise such stock options during the
Severance Period or for the remainder of the exercise
period, if less (other than awards under the Company's
Partnership Equity Program, which shall be governed by
the terms of such awards);
(vii) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which
shall be paid in a single lump sum not later than 15
days following the Executive's termination of
employment;
(viii)immediate vesting of the Executive's accrued benefits
under any supplemental retirement benefit plan ("SERP")
maintained by the Company, with payment of such benefits
to be made in accordance with the terms and conditions
of the SERP;
(ix) settlement of all deferred compensation arrangements in
accordance with any then applicable deferred
compensation plan or election form;
(x) continued participation in all medical, health and life
insurance plans at the same benefit level at which he
was participating on the date of termination of his
employment until the earlier of:
(A) the end of the Severance Period; or
(B) the date, or dates, he receives equivalent
coverage and benefits under the plans and programs
of a subsequent employer (such coverage and
benefits to be determined on a
coverage-by-coverage, or benefit-by-benefit,
basis); provided that (1) if the Executive is
precluded from continuing his participation in any
employee benefit plan or program as provided in
this clause (x) of this Section 10(e),
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<PAGE> 16
he shall receive cash payments equal on an
after-tax basis to the cost to him of obtaining
the benefits provided under the plan or program in
which he is unable to participate for the period
specified in this clause (x) of this Section
10(e), (2) such cost shall be deemed to be the
lowest reasonable cost that would be incurred by
the Executive in obtaining such benefit himself on
an individual basis, and (3) payment of such
amounts shall be made quarterly in advance; and
(xi) other or additional benefits then due or earned in
accordance with applicable plans and programs of the
Company.
For purposes of any termination pursuant to this Section 10(e), the term
"Severance Period" shall mean the period of 36 months following the termination
of the Executive's employment.
(f) APPROVED EARLY RETIREMENT OR NORMAL RETIREMENT. Upon the
Executive's Approved Early Retirement or Normal Retirement (each as defined
below), the Executive shall be entitled to and his sole remedies under this
Agreement shall be:
(i) Base Salary through the date of termination of the
Executive's employment, which shall be paid in a cash
lump sum not later than 15 days following the
Executive's termination of employment;
(ii) pro rata cash portion of annual incentive award for the
year in which termination occurs, based on performance
valuation at the end of such year and payable in a cash
lump sum promptly (but in no event later than 15 days)
thereafter;
(iii) elimination of all restrictions on any restricted stock
awards outstanding at the time of the Executive's
termination of employment;
(iv) continued vesting (as if the Executive remained employed
by the Company) of any deferred stock awards outstanding
at the time of his termination of employment (other than
awards under the Company's Partnership Equity Program,
which shall be governed by the terms of such awards);
(v) continued vesting of all outstanding stock options and
the right to exercise such stock options for a period of
one year following the later of the date the options are
fully vested or the Executive's termination of
employment or for the remainder of the exercise period,
if less (other than awards under the Company's
Partnership Equity Program, which shall be governed by
the terms of such awards); provided, however, that
options granted pursuant to the Company's 1987 Stock
Option Plan shall in no event be exercisable after three
years following termination of employment;
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<PAGE> 17
(vi) the balance of any incentive awards earned as of
December 31 of the prior year (but not yet paid), which
shall be paid in a single lump sum not later than 15
days following the Executive's termination of
employment;
(vii) settlement of all deferred compensation arrangements in
accordance with any then applicable deferred
compensation plan or election form; and
(viii)other or additional benefits then due or earned in
accordance with applicable plans and programs of the
Company.
"Approved Early Retirement" shall mean the Executive's voluntary
termination of employment with the Company at or after attaining age 55 but
prior to attaining age 60, if such termination is approved in advance by the
Committee.
"Normal Retirement" shall mean the Executive's voluntary termination
of employment with the Company at or after attaining age 60.
(g) NO MITIGATION; NO OFFSET. In the event of any termination of
employment, the Executive shall be under no obligation to seek other employment;
amounts due the Executive under this Agreement shall not be offset by any
remuneration attributable to any subsequent employment that he may obtain.
(h) NATURE OF PAYMENTS. Any amounts due under this Section 10 are
in the nature of severance payments considered to be reasonable by the Company
and are not in the nature of a penalty.
(i) EXCLUSIVITY OF SEVERANCE PAYMENTS. Upon termination of the
Executive's employment during the Term of Employment, he shall not be entitled
to any severance payments or severance benefits from the Company or any payments
by the Company on account of any claim by him of wrongful termination, including
claims under any federal, state or local human and civil rights or labor laws,
other than the payments and benefits provided in this Section 10.
(j) RELEASE OF EMPLOYMENT CLAIMS. The Executive agrees, as a
condition to receipt of the termination payments and benefits provided for in
this Section 10, that he will execute a release agreement, in a form reasonably
satisfactory to the Company, releasing any and all claims arising out of the
Executive's employment (other than enforcement of this Agreement, the
Executive's rights under any of the Company's incentive compensation and
employee benefit plans and programs to which he is entitled under this
Agreement, and any claim for any tort for personal injury not arising out of or
related to his termination of employment).
11. CONFIDENTIALITY; COOPERATION WITH REGARD TO LITIGATION;
NON-DISPARAGEMENT.
(a) During the Term of Employment and thereafter, the Executive
shall not, without the prior written consent of the Company, disclose to anyone
(except in good faith in the ordinary course of business to a person who will be
advised by the Executive to keep such information confidential) or make use of
any Confidential Information except in the performance of his duties hereunder
or when required to do so by legal process, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or
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<PAGE> 18
legislative body (including a committee thereof) that requires him to divulge,
disclose or make accessible such information. In the event that the Executive is
so ordered, he shall give prompt written notice to the Company in order to allow
the Company the opportunity to object to or otherwise resist such order.
(b) During the Term of Employment and thereafter, Executive shall
not disclose the existence or contents of this Agreement beyond what is
disclosed in the proxy statement or documents filed with the government unless
and to the extent such disclosure is required by law, by a governmental agency,
or in a document required by law to be filed with a governmental agency or in
connection with enforcement of his rights under this Agreement. In the event
that disclosure is so required, the Executive shall give prompt written notice
to the Company in order to allow the Company the opportunity to object to or
otherwise resist such requirement. This restriction shall not apply to such
disclosure by him to members of his immediate family, his tax, legal or
financial advisors, any lender, or tax authorities, or to potential future
employers to the extent necessary, each of whom shall be advised not to disclose
such information.
(c) "Confidential Information" shall mean all information
concerning the business of the Company or any Subsidiary relating to any of
their products, product development, trade secrets, customers, suppliers,
finances, and business plans and strategies. Excluded from the definition of
Confidential Information is information (i) that is or becomes part of the
public domain, other than through the breach of this Agreement by the Executive
or (ii) regarding the Company's business or industry properly acquired by the
Executive in the course of his career as an executive in the Company's industry
and independent of the Executive's employment by the Company. For this purpose,
information known or available generally within the trade or industry of the
Company or any Subsidiary shall be deemed to be known or available to the
public.
(d) "Subsidiary" shall mean any corporation controlled directly or
indirectly by the Company.
(e) The Executive agrees to cooperate with the Company, during the
Term of Employment and thereafter (including following the Executive's
termination of employment for any reason), by making himself reasonably
available to testify on behalf of the Company or any Subsidiary in any action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
and to assist the Company, or any Subsidiary, in any such action, suit, or
proceeding, by providing information and meeting and consulting with the Board
or its representatives or counsel, or representatives or counsel to the Company,
or any Subsidiary as reasonably requested; PROVIDED, HOWEVER, that the same does
not materially interfere with his then current professional activities. The
Company agrees to reimburse the Executive, on an after-tax basis, for all
expenses actually incurred in connection with his provision of testimony or
assistance.
(f) The Executive agrees that, during the Term of Employment and
thereafter (including following the Executive's termination of employment for
any reason) he will not make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally, or otherwise, or take
any action which may, directly or indirectly, disparage the Company or any
Subsidiary or their respective officers, directors, employees, advisors,
businesses or reputations. The Company agrees that, during the Term of
Employment and thereafter (including following the Executive's termination of
employment for any reason), the Company will not make statements or
representations, or otherwise communicate, directly or indirectly, in writing,
orally, or otherwise,
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<PAGE> 19
or take any action which may, directly or indirectly, disparage the Executive or
his business or reputation. Notwithstanding the foregoing, nothing in this
Agreement shall preclude either the Executive or the Company from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
12. NON-COMPETITION.
(a) During the Restriction Period (as defined in Section 12(b)
below), the Executive shall not engage in Competition with the Company or any
Subsidiary. "Competition" shall mean engaging in any activity, except as
provided below, for a Competitor of the Company or any Subsidiary, whether as an
employee, consultant, principal, agent, officer, director, partner, shareholder
(except as a less than one percent shareholder of a publicly traded company) or
otherwise. A "Competitor" shall mean any corporation or other entity engaged in
the retail drug pharmacy chain store business, any corporation or other entity
whose principal business is mail order pharmacy benefits management, or any
joint venture partners or investors of the Company, including without limitation
Eckerd Corporation, Revco D.S. Inc., Rite Aid Corporation and Walgreen Company
or their successors. If the Executive commences employment or becomes a
consultant, principal, agent, officer, director, partner, or shareholder of any
entity that is not a Competitor at the time the Executive initially becomes
employed or becomes a consultant, principal, agent, officer, director, partner,
or shareholder of the entity, future activities of such entity shall not result
in a violation of this provision unless (x) such activities were contemplated by
the Executive at the time the Executive initially became employed or becomes a
consultant, principal, agent, officer, director, partner, or shareholder of the
entity or (y) the Executive commences directly or indirectly overseeing or
managing the activities of an entity which becomes a Competitor during the
Restriction Period, which activities are competitive with the activities of the
Company or Subsidiary. The Executive shall not be deemed indirectly overseeing
or managing the activities of such Competitor which are competitive with the
activities of the Company or Subsidiary so long as he does not regularly
participate in discussions with regard to the conduct of the competing business.
(b) For the purposes of this Section 12, "Restriction Period"
shall mean the period beginning with the Effective Date and ending with:
(i) in the case of a termination of the Executive's
employment without Cause or a Constructive Termination
Without Cause, in either case prior to a Change in
Control, the earlier of (1) 24 months after such
termination and (2) the occurrence of a Change in
Control;
(ii) in the case of a termination of the Executive's
employment for Cause, the earlier of (1) 24 months after
such termination and (2) the occurrence of a Change in
Control;
(iii) in the case of a voluntary termination of the
Executive's employment pursuant to Section 10(d) above
followed by the Company's election to pay the Executive
(and subject to the payment of) 50% of his Base Salary,
as provided in Section 10(d) above, the earlier of (1)
18 months after such termination and (2) the occurrence
of a Change in Control;
- 16 -
<PAGE> 20
(iv) in the case of a voluntary termination of the
Executive's employment pursuant to Section 10(d) above
which is not followed by the Company's election to pay
the Executive such 50% of Base Salary, the date of such
termination;
(v) in the case of Approved Early Retirement or Normal
Retirement pursuant to Section 10(f) above, the
remainder of the Term of Employment; or
(vi) in the case of a termination of the Executive's
employment without Cause or a Constructive Termination
Without Cause, in either case following a Change in
Control, immediately upon such termination of
employment.
13. NON-SOLICITATION.
----------------
During the period beginning with the Effective Date and ending 18
months following the termination of the Executive's employment, the Executive
shall not induce employees of the Company or any Subsidiary to terminate their
employment, nor shall the Executive solicit or encourage any of the Company's or
any Subsidiary's non-retail customers or joint venture partners or investors to
terminate or diminish their relationship with the Company or any Subsidiary or
to violate any agreement with any of them. During such period, the Executive
shall not hire, either directly or through any employee, agent or
representative, any employee of the Company or any Subsidiary or any person who
was employed by the Company or any Subsidiary within 180 days of such hiring.
14. REMEDIES.
--------
If the Executive breaches any of the provisions contained in
Sections 11, 12 or 13 above, the Company (a) subject to Section 15, shall have
the right to immediately terminate all payments and benefits due under this
Agreement and (b) shall have the right to seek injunctive relief. The Executive
acknowledges that such a breach of Sections 11,12 or 13 would cause irreparable
injury and that money damages would not provide an adequate remedy for the
Company; provided, however, the foregoing shall not prevent the Executive from
contesting the issuance of any such injunction on the ground that no violation
or threatened violation of Section 11, 12 or 13 has occurred.
15. RESOLUTION OF DISPUTES.
----------------------
Any controversy or claim arising out of or relating to this
Agreement or any breach or asserted breach hereof or questioning the validity
and binding effect hereof arising under or in connection with this Agreement,
other than seeking injunctive relief under Section 14, shall be resolved by
binding arbitration, to be held at an office closest to the Company's principal
offices in accordance with the rules and procedures of the American Arbitration
Association. Judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. Pending the resolution of any
arbitration or court proceeding, the Company shall continue payment of all
amounts and benefits due the Executive under this Agreement. All costs and
expenses of any arbitration or court proceeding (including fees and
disbursements of counsel) shall be borne by the respective party incurring such
costs and expenses, but the Company shall reimburse the Executive for such
reasonable costs and expenses in the event he substantially
- 17 -
<PAGE> 21
prevails in such arbitration or court proceeding. Notwithstanding the foregoing,
following a Change in Control all reasonable costs and expenses (including fees
and disbursements of counsel) incurred by the Executive pursuant to this Section
15 shall be paid on behalf of or reimbursed to the Executive promptly by the
Company; PROVIDED, HOWEVER, that no reimbursement shall be made of such expenses
if and to the extent the arbitrator(s) determine(s) that any of the Executive's
litigation assertions or defenses were in bad faith or frivolous.
16. INDEMNIFICATION.
---------------
(a) COMPANY INDEMNITY. The Company agrees that if the Executive is
made a party, or is threatened to be made a party, to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director, officer or
employee of the Company or any Subsidiary or is or was serving at the request of
the Company or any Subsidiary as a director, officer, member, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether or not the
basis of such Proceeding is the Executive's alleged action in an official
capacity while serving as a director, officer, member, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the fullest
extent legally permitted or authorized by the Company's certificate of
incorporation or bylaws or resolutions of the Company's Board or, if greater, by
the laws of the State of Delaware against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith, and such
indemnification shall continue as to the Executive even if he has ceased to be a
director, member, officer, employee or agent of the Company or other entity and
shall inure to the benefit of the Executive's heirs, executors and
administrators. The Company shall advance to the Executive all reasonable costs
and expenses to be incurred by him in connection with a Proceeding within 20
days after receipt by the Company of a written request for such advance. Such
request shall include an undertaking by the Executive to repay the amount of
such advance if it shall ultimately be determined that he is not entitled to be
indemnified against such costs and expenses. The provisions of this Section
16(a) shall not be deemed exclusive of any other rights of indemnification to
which the Executive may be entitled or which may be granted to him, and it shall
be in addition to any rights of indemnification to which he may be entitled
under any policy of insurance.
(b) NO PRESUMPTION REGARDING STANDARD OF CONDUCT. Neither the
failure of the Company (including its Board, independent legal counsel or
stockholders) to have made a determination prior to the commencement of any
proceeding concerning payment of amounts claimed by the Executive under Section
16(a) above that indemnification of the Executive is proper because he has met
the applicable standard of conduct, nor a determination by the Company
(including its Board, independent legal counsel or stockholders) that the
Executive has not met such applicable standard of conduct, shall create a
presumption that the Executive has not met the applicable standard of conduct.
(c) LIABILITY INSURANCE. The Company agrees to continue and
maintain a directors and officers' liability insurance policy covering the
Executive to the extent the Company provides such coverage for its other
executive officers.
- 18 -
<PAGE> 22
17. EXCISE TAX GROSS-UP.
-------------------
If the Executive becomes entitled to one or more payments (with a
"payment" including, without limitation, the vesting of an option or other
non-cash benefit or property), whether pursuant to the terms of this Agreement
or any other plan, arrangement, or agreement with the Company or any affiliated
company (the "Total Payments"), which are or become subject to the tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")
(or any similar tax that may hereafter be imposed) (the "Excise Tax"), the
Company shall pay to the Executive at the time specified below an additional
amount (the "Gross-up Payment") (which shall include, without limitation,
reimbursement for any penalties and interest that may accrue in respect of such
Excise Tax) such that the net amount retained by the Executive, after reduction
for any Excise Tax (including any penalties or interest thereon) on the Total
Payments and any federal, state and local income or employment tax and Excise
Tax on the Gross-up Payment provided for by this Section 17, but before
reduction for any federal, state, or local income or employment tax on the Total
Payments, shall be equal to the sum of (a) the Total Payments, and (b) an amount
equal to the product of any deductions disallowed for federal, state, or local
income tax purposes because of the inclusion of the Gross-up Payment in the
Executive's adjusted gross income multiplied by the highest applicable marginal
rate of federal, state, or local income taxation, respectively, for the calendar
year in which the Gross-up Payment is to be made. For purposes of determining
whether any of the Total Payments will be subject to the Excise Tax and the
amount of such Excise Tax:
(i) The Total Payments shall be treated as "parachute payments"
within the meaning of Section 280G(b)(2) of the Code, and all
"excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the
Excise Tax, unless, and except to the extent that, in the
written opinion of independent compensation consultants,
counsel or auditors of nationally recognized standing
("Independent Advisors") selected by the Company and
reasonably acceptable to the Executive, the Total Payments (in
whole or in part) do not constitute parachute payments, or
such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within
the meaning of Section 280G(b)(4) of the Code in excess of the
base amount within the meaning of Section 280G(b)(3) of the
Code or are otherwise not subject to the Excise Tax;
(ii) The amount of the Total Payments which shall be treated as
subject to the Excise Tax shall be equal to the lesser of (A)
the total amount of the Total Payments or (B) the total amount
of excess parachute payments within the meaning of Section
280G(b)(1) of the Code (after applying clause (i) above); and
(iii) The value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Independent Advisors in
accordance with the principles of Sections 280G(d)(3) and (4)
of the Code.
For purposes of determining the amount of the Gross-up Payment, the
Executive shall be deemed (A) to pay federal income taxes at the highest
marginal rate of federal income taxation for the calendar year in which the
Gross-up Payment is to be made; (B) to pay any applicable state and local income
taxes at the highest marginal rate of taxation for the calendar
- 19 -
<PAGE> 23
year in which the Gross-up Payment is to be made, net of the maximum reduction
in federal income taxes which could be obtained from deduction of such state and
local taxes if paid in such year (determined without regard to limitations on
deductions based upon the amount of the Executive's adjusted gross income); and
(C) to have otherwise allowable deductions for federal, state, and local income
tax purposes at least equal to those disallowed because of the inclusion of the
Gross-up Payment in the Executive's adjusted gross income. In the event that the
Excise Tax is subsequently determined to be less than the amount taken into
account hereunder at the time the Gross-up Payment is made, the Executive shall
repay to the Company at the time that the amount of such reduction in Excise Tax
is finally determined (but, if previously paid to the taxing authorities, not
prior to the time the amount of such reduction is refunded to the Executive or
otherwise realized as a benefit by the Executive) the portion of the Gross-up
Payment that would not have been paid if such Excise Tax had been applied in
initially calculating the Gross-up Payment, plus interest on the amount of such
repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time the Gross-up Payment is made (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross-up Payment), the Company shall make an additional Gross-up Payment in
respect of such excess (plus any interest and penalties payable with respect to
such excess) at the time that the amount of such excess is finally determined.
The Gross-up Payment provided for above shall be paid on the 30th
day (or such earlier date as the Excise Tax becomes due and payable to the
taxing authorities) after it has been determined that the Total Payments (or any
portion thereof) are subject to the Excise Tax; PROVIDED, HOWEVER, that if the
amount of such Gross-up Payment or portion thereof cannot be finally determined
on or before such day, the Company shall pay to the Executive on such day an
estimate, as determined by the Independent Advisors, of the minimum amount of
such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code), as soon as
the amount thereof can be determined. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a loan by the Company to the Executive, payable on
the fifth day after demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code). If more than one Gross-up
Payment is made, the amount of each Gross-up Payment shall be computed so as not
to duplicate any prior Gross-up Payment. The Company shall have the right to
control all proceedings with the Internal Revenue Service that may arise in
connection with the determination and assessment of any Excise Tax and, at its
sole option, the Company may pursue or forego any and all administrative
appeals, proceedings, hearings, and conferences with any taxing authority in
respect of such Excise Tax (including any interest or penalties thereon);
PROVIDED, HOWEVER, that the Company's control over any such proceedings shall be
limited to issues with respect to which a Gross-up Payment would be payable
hereunder, and the Executive shall be entitled to settle or contest any other
issue raised by the Internal Revenue Service or any other taxing authority. The
Executive shall cooperate with the Company in any proceedings relating to the
determination and assessment of any Excise Tax and shall not take any position
or action that would materially increase the amount of any Gross-Up Payment
hereunder.
18. EFFECT OF AGREEMENT ON OTHER BENEFITS.
-------------------------------------
Except as specifically provided in this Agreement, the existence of
this Agreement shall not be interpreted to preclude, prohibit or restrict the
Executive's participation in any other employee benefit or other plans or
programs in which he currently participates.
- 20 -
<PAGE> 24
19. ASSIGNABILITY; BINDING NATURE.
-----------------------------
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and permitted assigns. No rights or obligations of the Company under this
Agreement may be assigned or transferred by the Company except that such rights
or obligations may be assigned or transferred in connection with the sale or
transfer of all or substantially all of the assets of the Company, provided that
the assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale or transfer of assets as described in the preceding sentence, it
shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 25 below.
20. REPRESENTATION.
--------------
The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization.
21. ENTIRE AGREEMENT.
----------------
This Agreement contains the entire understanding and agreement
between the Parties concerning the subject matter hereof and, as of the
Effective Date, supersedes all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral, between the Parties with
respect thereto, including, without limitation, the Income Continuation Policy
for Select Senior Executives of CVS Corporation.
22. AMENDMENT OR WAIVER.
-------------------
No provision in this Agreement may be amended unless such amendment
is agreed to in writing and signed by the Executive and an authorized officer of
the Company. Except as set forth herein, no delay or omission to exercise any
right, power or remedy accruing to any Party shall impair any such right, power
or remedy or shall be construed to be a waiver of or an acquiescence to any
breach hereof. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.
23. SEVERABILITY.
------------
In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.
- 21 -
<PAGE> 25
24. SURVIVORSHIP.
------------
The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.
25. BENEFICIARIES/REFERENCES.
------------------------
The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
26. GOVERNING LAW/JURISDICTION.
--------------------------
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of Rhode Island without reference to principles of
conflict of laws. Subject to Section 15, the Company and the Executive hereby
consent to the jurisdiction of any or all of the following courts for purposes
of resolving any dispute under this Agreement: (i) the United States District
Court for Rhode Island or (ii) any of the courts of the State of Rhode Island.
The Company and the Executive further agree that any service of process or
notice requirements in any such proceeding shall be satisfied if the rules of
such court relating thereto have been substantially satisfied. The Company and
the Executive hereby waive, to the fullest extent permitted by applicable law,
any objection which it or he may now or hereafter have to such jurisdiction and
any defense of inconvenient forum.
27. NOTICES.
-------
Any notice given to a Party shall be in writing and shall be deemed
to have been given when delivered personally or sent by certified or registered
mail, postage prepaid, return receipt requested, duly addressed to the Party
concerned at the address indicated below or to such changed address as such
Party may subsequently give such notice of:
If to the Company: CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
Attention: Secretary
If to the Executive _____________________
_____________________
_____________________
28. HEADINGS.
--------
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
- 22 -
<PAGE> 26
29. COUNTERPARTS.
------------
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
CVS CORPORATION
By:
--------------------------------------
Name:
Title:
-----------------------------------------
------------------
- 23 -
<PAGE> 1
EXHIBIT 11
----------
CVS CORPORATION
<TABLE>
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
- -------------------------------------------------------------------------------
Years Ended December 31,
- -------------------------------------------------------------------------------
In millions, except per share amounts 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER SHARE:
Net earnings (loss) $ 75.4 $(657.1) $307.5
Less: Preference dividends, net 14.5 17.0 17.0
- --------------------------------------------------------------------------------
Net earnings (loss) used to
calculate primary earnings (loss)
per share $ 60.9 $(674.1) $290.5
- --------------------------------------------------------------------------------
Weighted average number of shares
outstanding 105.7 105.1 105.5
Add: Weighted average number of
shares which could have been
issued upon exercise of
outstanding options 0.6 -- --
- --------------------------------------------------------------------------------
Weighted average number of shares used
to compute primary earnings (loss)
per share 106.3 105.1 105.5
- --------------------------------------------------------------------------------
Primary earnings (loss) per share $ 0.57 $ (6.41) $2.75
- --------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) $ 75.4 $(657.1) $307.5
Less: Preferred dividends -- 0.1 0.1
- --------------------------------------------------------------------------------
Net earnings (loss) used to calculate
fully diluted earnings (loss) per
share, before adjustments 75.4 (657.2) 307.4
Less: Adjustments, assuming conversion
of the Series One ESOP Convertible
Preference Stock, for the following:
(i) additional contributions to the
ESOP to cover the shortfall between
the Series One ESOP Convertible
Preference Stock and Common Stock
dividends and (ii) reductions in
incentive bonuses and profit sharing,
net of tax benefits 8.0 (1.2) 0.6
- --------------------------------------------------------------------------------
Net earnings (loss) used to calculate
fully diluted earnings (loss)
per share $ 67.4 $(656.0) $306.8
- --------------------------------------------------------------------------------
Weighted average number of shares
outstanding 105.7 105.1 105.5
Add: Weighted average shares of
Series One Convertible Preference
Stock assuming conversion 5.9 7.4 7.3
Add: Weighted average number of
shares which could have been
issued upon exercise of
outstanding options 0.7 0.0 0.0
- --------------------------------------------------------------------------------
Weighted average number of shares
used to compute fully diluted
earnings (loss) per share 112.3 112.5 112.8
- --------------------------------------------------------------------------------
Fully diluted earnings (loss) per share $ 0.60 $ (5.83) $ 2.72
- --------------------------------------------------------------------------------
</TABLE>
NOTE - Fully diluted earnings per share presentation is not required on the face
of the consolidated statements of operations due to the results of the
materiality tests mandated by APB Opinion No. 15.
<PAGE> 1
EXHIBIT 12
----------
<TABLE>
CVS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
- ------------------------------------------------------------------------------------------
Dollars in millions 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED CHARGES: (1)
Interest expense $ 30.6 $ 53.7 $ 31.6 $ 24.4 $ 23.6
Interest capitalized 0.1 0.2 0.2 0.6 0.1
Interest portion of operating leases 58.7 56.9 51.4 47.5 38.4
Interest portion of capital leases 0.3 0.4 0.4 0.5 0.6
Amortization of debt expense 0.1 0.1 0.1 0.1 0.1
- ------------------------------------------------------------------------------------------
Total fixed charges $ 89.8 $111.3 $ 83.7 $ 73.1 $ 62.8
- ------------------------------------------------------------------------------------------
ADJUSTED FIXED CHARGES:
Total fixed charges $ 89.8 $111.3 $ 83.7 $ 73.1 $ 62.8
Interest capitalized (0.1) (0.2) (0.2) (0.6) (0.1)
- ------------------------------------------------------------------------------------------
Adjusted fixed charges $ 89.7 $111.1 $ 83.5 $ 72.5 $ 62.7
- ------------------------------------------------------------------------------------------
EARNINGS (LOSS) (1)(2)(3)(4)(5):
Net earnings (loss) from continuing
operations before income taxes $403.4 $(44.9) $153.0 $155.8 $111.4
Adjusted fixed charges 89.7 111.1 83.5 72.5 62.7
- ------------------------------------------------------------------------------------------
Adjusted earnings $493.1 $ 66.2 $236.5 $228.3 $174.1
- ------------------------------------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES 5.50 0.60 2.83 3.15 2.78
- ------------------------------------------------------------------------------------------
(1) The results of operations of the former footwear, apparel and toys and home-
furnishing segments have been classified as discontinued operations in the
Consolidated Statement of Operations for all periods presented
(2) The Company formed an Employee Stock Ownership Plan effective January 1,
1989. On June 23, 1989, the ESOP Trust borrowed $357.5 million from
qualified lenders, the proceeds of which were used to purchase a new series
of preference stock issued by the Company. The loan to the ESOP Trust has
been guaranteed by the Company. Annualized dividends on preference stock
totaled $ 21.8 million in 1996, $24.3 million in 1995, $24.9 million in
1994, $25.3 million in 1993 and $25.8 million in 1992. These amounts are
not reflected in the calculations above.
(3) Net earnings (loss) from continuing operations before income taxes for
1992 includes the effect of $59.4 million of restructuring charges.
(4) Net earnings (loss) from continuing operations before income taxes for
1995 includes the effect of $165.6 million of restructuring and asset
impairment charges and $49.4 million of non-recurring operating charges.
(5) Net earnings (loss) from continuing operations before income taxes for
1996 includes the effect of $121.4 million gain on sale of securities.
</TABLE>
<PAGE> 1
EXHIBIT 13
1996 Financial Report
Management's Discussion and Analysis
of Financial Condition and Results of Operations
28
Management's Responsibility for Financial Reporting
34
Independent Auditors' Report
35
Consolidated Statements of Operations
36
Consolidated Balance Sheets
37
Consolidated Statements of Shareholders' Equity
38
Consolidated Statements of Cash Flows
39
Notes to Consolidated Financial Statements
40
Five-Year Financial Summary
53
<PAGE> 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
STRATEGIC RESTRUCTURING PROGRAM
THE 1995 PLAN
On October 23, 1995 (the "1995 Measurement Date"), the Board of Directors of CVS
Corporation ("CVS" or the "Company")approved a comprehensive restructuring plan
that was the product of a strategic review initiated in 1994. The restructuring
plan included, among other things, (i) the continued operation of CVS (which
includes CVS, and initially the Linens 'n Things and Bob's divisions), (ii) the
disposal of the Marshalls, Kay-Bee Toys, Wilsons and This End Up divisions
(collectively, the "Dispositions"), (iii) the spin-off of Footstar, Inc.
("Footstar"), which includes the Meldisco, Footaction and Thom McAn divisions,
and (iv) the elimination of certain corporate overhead costs (the "Cost
Reduction Program").
In connection with the approval of the 1995 Plan, the Company recorded a pre-tax
charge of $872.0 million in the fourth quarter of 1995 (the "1995 Charge") and
discontinued the footwear segment in accordance with Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations--Reporting the
effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." As a result of the 1996 Plan
discussed below, the apparel segment and toys and home furnishings segment were
also discontinued. Accordingly, the portion of the 1995 Charge that pertains to
these segments, $711.4 million, is reflected as a component of discontinued
operations, and the remainder, $160.6 million, is included in continuing
operations. The amount recorded in continuing operations primarily includes
costs associated with (i) exiting certain geographic markets, (ii) closing
duplicate warehouse facilities and (iii) closing Melville's Corporate
Headquarters. These costs primarily include asset write-offs, closed store and
warehouse lease liabilities and employee severance. Management determined the
amount of (i) asset write-offs by comparing the carrying value of the assets to
be disposed of to the anticipated proceeds, (ii) closed store and warehouse
lease liabilities by calculating the present value of the future minimum lease
payments and (iii) employee severance based on an employee's compensation and
years of service with the Company. The Company applied the provisions of EITF
94-3 to determine the appropriate accounting treatment for these charges.
Asset write-offs included in the 1995 Charge totaled $659.7 million. The balance
of the charge, $212.3 million, will require cash outlays of which $85.7 million
had been incurred as of December 31, 1996. The remaining cash outlays are
expected to be incurred primarily in 1997.
In connection with various components of the 1995 Plan, positions for
approximately 1,200 store employees and 400 administrative employees have been
eliminated.
At December 31, 1996, the 1995 Plan had been completed without significant
changes to the Board approved plan. As a result, the Company expects that
earnings from continuing operations before income taxes will improve by
approximately $38 million on an annual basis (projected 1997 versus 1995)
primarily due to the elimination of certain corporate overhead costs.
THE 1996 PLAN
On May 29, 1996 (the "1996 Measurement Date"), the Board of Directors approved
further refinements to the restructuring plan. The refinements included (i) a
formal plan to separate the Linens 'n Things and Bob's divisions from CVS and
(ii) a formal plan to convert 80 to 100 of Thom McAn's stores to the Footaction
store format and to exit the Thom McAn business by mid-1997.
In connection with the approval of the 1996 Plan, the Company recorded, as a
component of discontinued operations, a pre-tax charge of $235.0 million during
the second quarter of 1996 (the "1996 Charge"), substantially all of which
related to asset write-offs that will not require net cash outlays. As a result
of adopting the plan to separate the Linens 'n Things and Bob's divisions from
CVS, the apparel and toys and home furnishings segments were discontinued in
accordance with APB Opinion No. 30.
The Company expects that the 1996 Plan will be completed during 1997 without
significant changes to the Board approved plan.
The asset write-offs of $659.7 million and $235.0 million included in the 1995
Charge and 1996 Charge, respectively, primarily relate to the write-down of the
operating divisions to be disposed of to estimated fair value. The significant
judgement included in the above write-offs relates to the estimation of fair
value for each division. These estimates were prepared by independent third
parties.
THE DISPOSALS
On November 17, 1995, the Company completed the sale of the Marshalls division
to The TJX Companies, Inc. for total proceeds of approximately $600 million.
28
<PAGE> 3
On May 4, 1996, the Company completed the sale of the Kay-Bee Toys division to
Consolidated Stores Corporation for total proceeds of approximately $285.7
million.
On May 25, 1996, the Company completed the sale of the Wilsons division to an
investor group led by Wilsons' management for total proceeds of approximately
$69.7 million.
On May 31, 1996, the Company completed the sale of the This End Up division to
an investor group for approximately $18.2 million.
On October 12, 1996, the Company completed the spin-off of Footstar by
distributing 100% of the shares of Footstar common stock held by CVS to its
shareholders of record as of the close of business on October 2, 1996 (the
"Footstar Distribution"). See Note 20 for further information about the Footstar
Distribution.
On December 2, 1996, the Company completed the initial public offering of 67.5%
of Linens 'n Things, Inc. (the "Linens IPO") for net proceeds of approximately
$189.4 million.
The gain and losses that resulted from the above disposals are reflected in the
"Discontinued Operations" section of the Consolidated Statements of Operations.
The 1996 Charge includes approximately $47 million related to finalizing certain
disposals accrued for in the 1995 Charge. The Company has no continuing
involvement with the divested operations.
OTHER EVENTS
On October 16, 1996, the Company's trading symbol on the New York Stock Exchange
was changed to "CVS" from "MES."
On November 20, 1996, the Company officially changed its name to CVS Corporation
from Melville Corporation.
See Note 2 to the consolidated financial statements for further information
about the Company's strategic restructuring program.
AGREEMENT TO ACQUIRE REVCO D.S., INC.
On February 6, 1997, CVS signed a definitive merger agreement to acquire Revco
D.S., Inc. ("Revco") in a stock-for-stock merger valued at approximately $2.8
billion. CVS will also assume approximately $900 million of existing Revco debt
as part of this transaction.
The combination of CVS and Revco, which has been approved by the Boards of
Directors of both companies, will bring together two of the leading companies in
the chain-drug industry to create the nation's largest chain drugstore company
based on store count, with approximately 4,000 locations in 24 states and the
District of Columbia. The combination will bring the combined company into
high-growth, contiguous markets in the Northeast, Mid-Atlantic, Southeast and
Midwest regions; and the combined enterprise is expected to rank second in
annual retail drugstore revenues in 1997.
Under the terms of the merger agreement, CVS will combine with Revco in an
exchange of stock that is expected to qualify for treatment as a pooling of
interests transaction, tax free to Revco shareholders. If the merger is
completed, for each share of Revco common stock held, Revco shareholders will
receive the sum of (i) 0.4692 shares of CVS common stock and (ii) the number of
shares of CVS common stock equal to the quotient obtained by dividing $20 by the
average closing price of CVS common stock during ten trading days randomly
selected out of the twenty trading days ending on the fifth trading day
preceding the closing date (collectively, the "Exchange Ratio"), provided that,
under no circumstances will the Exchange Ratio exceed 1.0097 or be less than
0.8837.
The transaction is subject to approval by the shareholders of both companies,
expiration of the applicable waiting period under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended, and certain other customary
closing conditions. If all the closing conditions have been met, it is expected
that the transaction will be completed by mid-year 1997.
REVISED DIVIDEND
On January 10, 1996, the Board of Directors approved a reduction in the
Company's quarterly dividend from $.38 per share to $.11 per share (the "Revised
Dividend"). Management believes that the Revised Dividend is consistent with
chain-drug industry practice and the Company's anticipated capital requirements.
RESULTS OF OPERATIONS
As a result of the Company's strategic restructuring plan, the results of
operations of the former footwear segment, apparel segment and toys and home
furnishings segment have been classified as discontinued operations in the
accompanying consolidated statements of operations for all periods presented.
The following management discussion, therefore, focuses primarily on continuing
operations.
29
<PAGE> 4
Net sales increased 13.6% to $5.5 billion in 1996, compared to increases of
12.4% in 1995 and 9.7% in 1994. The increase in net sales resulted from strong
performances in both the front store (which increased $262.3 million or 9.3%
from 1995 to 1996, compared to an increase of $241.0 million or 9.3% from 1994
to 1995) and pharmacy (which increased $376.0 million or 18.4% from 1995 to
1996, compared to an increase of $294.5 million or 16.9% from 1994 to 1995). The
growth in front store sales was primarily driven by increases in greeting cards,
film and photofinishing, upscale beauty and cosmetics, convenience foods,
private label products and seasonal merchandise. Growth in pharmacy sales was
primarily driven by (i) increased penetration into managed care markets, (ii)
the purchase of prescription files from independent pharmacies and (iii)
favorable trends, including an aging American population, greater demand for
retail formats that provide easy access and convenience, discovery of new drug
therapies and a need for cost-effective healthcare solutions.
Same store sales, consisting of sales from stores that have been open for more
than one year, rose 10.9% in 1996, compared to increases of 8.8% in 1995 and
6.1% in 1994. Pharmacy same store sales grew 16.9% in 1996, compared to 13.9% in
1995 and 11.5% in 1994. Pharmacy sales were 43.9% of total sales in 1996,
compared to 42.0% in 1995 and 40.4% in 1994. Third party prescription sales were
81.8% of pharmacy sales in 1996, compared to 76.1% in 1995 and 69.1% in 1994.
Gross margin as a percentage of net sales was 28.04% in 1996, compared to 27.92%
in 1995 and 28.68% in 1994. The 12 basis point improvement as a percentage of
net sales in 1996 was primarily due to sales increases in the following higher
gross margin categories: greeting cards, film and photofinishing, upscale beauty
and cosmetics, convenience foods, private label products and seasonal
merchandise. The benefit realized from the expansion of these categories in 1996
was offset partially by expected increases in lower gross margin third party
prescription sales and increases in pharmacy sales as a percentage of total
sales (collectively, the "Pharmacy Trends"). The 76 basis point decrease in
gross margin as a percentage of net sales in 1995 is primarily due to the
Pharmacy Trends.
Selling, general and administrative expenses were 21.24% of net sales in 1996,
compared to 22.88% in 1995 and 22.96% in 1994. When comparing 1996 to 1995, it
is important to note that $49.4 million of non-recurring operating charges were
recorded in the fourth quarter of 1995. These charges primarily included initial
start-up costs or asset write-offs associated with the Company (i) changing its
policy from capitalizing internally developed software costs to expensing the
costs as incurred, (ii) outsourcing certain technology functions and (iii)
retaining certain employees at Melville's Corporate Headquarters until their
respective job functions were transitioned to CVS. Excluding the effect of these
charges, comparable selling, general and administrative expenses were 21.87% of
net sales in 1995. The comparable 63 and 109 basis point improvements in 1996
and 1995, respectively, were primarily due to (i) the benefit derived from sales
in our existing store base growing at a faster rate than operating costs, (ii)
the Cost Reduction Program, which included closing Melville's Corporate
Headquarters and (iii) the benefits derived from key technology investments such
as our RX 2000 Pharmacy System, Interactive Voice Response System for
prescription refills, Pharmacy Data Warehouse, Point-of-Sale System, Retail Data
Warehouse and Field Management System. These systems have collectively allowed
the Company to reduce the labor costs associated with filling prescriptions,
managing third party heathcare plans, managing promotional events and scheduling
employees.
Depreciation and amortization expense as a percentage of net sales was 1.38% in
1996, compared to 1.46% in 1995 and 1.47% in 1994. The eight basis point
improvement in 1996 was primarily due to the write-off of certain corporate
assets as part of the Company's strategic restructuring plan.
Operating profit for 1996 increased to $299.6 million from $8.6 million in
1995. When comparing 1996 to 1995, it is important to note that $165.6 million
of restructuring and asset impairment charges and $49.4 million of non-recurring
operating charges included in selling, general and administrative expenses, were
recorded in 1995 (collectively, the "Special Charges"). Excluding the effect of
the Special Charges, comparable operating profit increased 34.0% in 1996.
Comparable operating profit as a percentage of net sales was 5.42% in 1996,
compared to 4.60% in 1995 and 4.24% in 1994. The 82 basis point improvement in
operating profit as a percentage of net sales in 1996 was primarily due to (i)
leveraging sales growth, (ii) improving gross margin as a percentage of net
sales, (iii) the benefits derived from key technology investments, (iv)
controlling ongoing fixed costs and (v) the Cost Reduction Program. The 36 basis
point improvement in 1995 was primarily due to controlling ongoing fixed costs,
offset partially by a decrease in gross margin as a percentage of net sales.
During 1996, the Company completed the sale of 1.75 million shares of The TJX
Companies, Inc. Series D and Series E preferred stock (the "TJX Securities") for
$296.4 million (the "TJX Preferred Sales"). These transactions resulted in a
pre-tax gain of $121.4 million (the "TJX Gain"). The Company originally received
the TJX Securities as a portion of the proceeds from the sale of the Marshalls
division.
30
<PAGE> 5
During 1996, the Company recognized dividend income of approximately $5.6
million on the TJX Securities.
Interest expense totaled $30.7 million in 1996, compared to $53.9 million in
1995 and $31.8 million in 1994. The decrease in interest expense in 1996 was
primarily due to a $573.7 million reduction in average daily short-term
borrowings, offset partially by higher average daily short-term borrowing rates.
The decrease in average daily short-term borrowings in 1996 was primarily due to
the favorable impact of (i) the Dispositions, (ii) the Linens IPO, (iii) the TJX
Preferred Sales and (iv) cash provided by continuing operations. The $22.1
million increase in interest expense in 1995 was primarily due to a $188.7
million increase in average daily short-term borrowings that resulted largely
from operating losses and disappointing cash flow results at certain former
divisions.
Interest income totaled $7.5 million in 1996, compared to $.4 million in 1995
and $1.0 million in 1994. The increase in interest income in 1996 was primarily
due to interest earned on notes receivable that were received as a portion of
the proceeds from certain of the Dispositions and to an increase in available
cash that resulted from (i) the Dispositions, (ii) the Linens IPO, (iii) the TJX
Preferred Sales and (iv) cash provided by continuing operations. The decrease in
interest income in 1995 was primarily due to a decrease in available cash that
resulted from operating losses and disappointing cash flow results at certain
former divisions.
The Company's effective income tax rate for continuing operations was 40.6% in
1996, compared to 41.0% in 1995 and 1994. The 40 basis point decrease in 1996
was primarily due to the TJX Gain.
Earnings from continuing operations increased to $239.6 million in 1996 from a
net loss of $26.5 million in 1995. Excluding the TJX Gain in 1996, earnings from
continuing operations were $167.5 million, or $1.44 per share. Excluding the
Special Charges in 1995, earnings from continuing operations were $100.3
million, or $.79 per share. In 1994, earnings from continuing operations were
$90.3 million, or $.70 per share.
Discontinued operations consists of (i) (loss) earnings from operations, net of
income tax benefit (provision), which represents the earnings or loss for a
segment from the date of the earliest period presented to the respective
segment's measurement date, and (ii) estimated loss on disposal, net of income
tax benefit, which represents the estimated loss on disposal plus the segment's
operating income or loss during the phase-out period. The phase-out period is
defined as the period from the segment's measurement date to the date of
disposal. The estimated loss on disposal was based on the difference between
the carrying value of the segment affected and the estimated proceeds the
Company expects to realize upon disposition. The estimated proceeds were the
result of analyses prepared by independent third parties.
Net earnings including (i) continuing operations which includes the TJX Gain and
(ii) discontinued operations which includes an after-tax restructuring charge of
$148.0 million, or $1.40 per share, were $75.4 million, or $.57 per share in
1996. This compares to a net loss of $657.1 million, or $6.41 per share in 1995
and net earnings of $307.5 million, or $2.75 per share in 1994. The decrease in
net earnings in 1995 was primarily due to the Special Charges.
As of December 31, 1996, CVS operated 1,408 stores in 14 states and the District
of Columbia, an increase of 3.1% from 1,366 stores as of December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion regarding liquidity and capital resources should be
read in conjunction with the Company's consolidated balance sheets as of
December 31, 1996 and 1995, and the related consolidated statements of
operations and cash flows for each of the years in the three-year period ended
December 31, 1996.
The Company has four primary sources of liquidity: (i) cash and cash
equivalents, (ii) cash provided by operations, (iii) commercial paper and (iv)
bank loan participation notes. The Company's commercial paper program is
supported by a $320 million, five-year unsecured revolving credit facility (the
"Credit Facility"). The Credit Facility contains customary financial and
operating covenants. Management believes that the restrictions contained in
these covenants do not materially affect the Company's financial flexibility.
The Company issues commercial paper to finance, in part, its seasonal inventory
requirements and capital expenditures. Borrowing levels throughout the year are
typically higher than those reflected in the Company's year-end balance sheet.
Management believes that the Company's cash on hand and cash provided by
operations, together with its ability to secure short-term financing through
commercial paper and bank loan participation notes, will be sufficient to cover
its working capital, capital expenditure and debt service requirements.
31
<PAGE> 6
<TABLE>
Following is a summary of the Company's liquidity as of and for the years ended
December 31:
<CAPTION>
================================================================================
In millions, except ratios 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 423.9 $ 129.6 $ 117.0
Net cash provided by (used in)
investing activities 501.8 23.8 (371.1)
Net cash used in
financing activities (341.2) (356.7) (91.3)
Average daily short-term
borrowings 182.4 756.1 567.4
Maximum short-term borrowings 543.1 1,196.2 948.5
Short-term borrowings at year-end -- 52.0 200.0
Net interest expense 23.2 53.5 30.8
- --------------------------------------------------------------------------------
Ratios:
Net investments
(long-term obligations)
to total capitalization(1) 19.3% (1.2)% (7.9)%
Inventory turns--
continuing operations 4.10 3.93 3.69
Current ratio 1.6 1.4 1.6
================================================================================
<FN>
(1) The ratio of net investments (long-term obligations) to total capitalization
was calculated by dividing (i) long-term debt less the sum of cash and cash
equivalents plus investments by (ii) the sum of long-term debt plus total
shareholders' equity.
</TABLE>
Cash and cash equivalents increased $294.3 million to $423.9 million in 1996
primarily due to the favorable impact of (i) the Dispositions, (ii) the Linens
IPO, (iii) the TJX Preferred Sales, (iv) the Revised Dividend and (v) cash
provided by continuing operations. The cash flow benefit derived from these
sources was offset partially by the settlement of certain obligations that were
established as part of the Company's strategic restructuring plan and by certain
contributions made in connection with the Footstar Distribution and the Linens
IPO. Cash and cash equivalents did not change materially in 1995 from 1994.
Net cash provided by operating activities decreased $211.8 million to $133.7
million in 1996 primarily due to the timing of (i) the Dispositions, (ii) the
Footstar Distribution, (iii) the Linens IPO and (iv) the settlement of certain
obligations that were established as part of the strategic restructuring plan.
Net cash provided by operating activities decreased $152.9 million to $345.5
million from 1994 to 1995 primarily due to the timing of the sale of the
Marshalls division and operating losses and disappointing cash flow results at
certain former divisions.
Net cash provided by investing activities increased $478.0 million to $501.8 in
1996 primarily due to (i) the Dispositions other than the sale of the Marshalls
division, (ii) the Linens IPO, and (iii) the TJX Preferred Sales. Net cash
provided by investing activities increased $394.9 million from 1994 to 1995
primarily due to the sale of the Marshalls division.
Net cash used in financing activities decreased $15.5 million to $341.2 million
in 1996 primarily due to (i) the Revised Dividend, (ii) a reduction of the
amount of cash used to reduce notes payable and (iii) the proceeds received from
the exercise of stock options. The favorable impact of these changes was offset
partially by a decrease in book overdrafts. Net cash used in financing
activities increased $265.4 million to $356.7 million from 1994 to 1995
primarily due to a $148 million reduction in notes payable and the repurchase of
approximately $26.3 million of the Company's common stock in connection with
managing the Company's stock incentive plans.
During 1997, the Company intends to sell the note receivable that was received
as a portion of the proceeds from the sale of the Kay-Bee Toys division. In
addition, the Company intends to sell, subject to market conditions, its
remaining 32.5% ownership interest in Linens 'n Things, Inc. See Note 5 to the
consolidated financial statements for further information about these
investments.
Management believes that the Company's cash on hand and cash provided by
operations, together with its ability to secure short-term financing through
commercial paper and bank loan participation notes, will be sufficient to cover
the combined working capital, capital expenditure and debt service requirements
of CVS and Revco in the event the contemplated merger is completed.
CAPITAL EXPENDITURES
Capital expenditures were $224.4 million, $395.0 million and $421.4 million in
1996, 1995 and 1994, respectively. These expenditures were primarily for (i) new
stores, (ii) improvements to existing stores, (iii) store equipment, (iv)
information systems and (v) distribution and office facilities. The lower
capital expenditure level in 1996 was primarily due to the Dispositions.
32
<PAGE> 7
Accounting Changes
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." While
SFAS No. 123 established financial accounting and reporting standards for
stock-based employee compensation plans using a fair value method of accounting,
it allows companies to continue to measure compensation using the intrinsic
value method of accounting prescribed in APB Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company will continue to use its present APB No.
25 accounting treatment for stock-based compensation. See Note 14 to the
consolidated financial statements for further information about SFAS No. 123.
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
recorded a pre-tax asset impairment charge of $110.4 million ($5.0 million of
which pertained to continuing operations) in connection with the write-down of
certain fixed and intangible assets. See Note 1 to the consolidated financial
statements for further information.
During the fourth quarter of 1995, the Company changed its policy from
capitalizing internally developed software costs to expensing the costs as
incurred and recorded a charge of $74.5 million ($37.8 million of which
pertained to continuing operations). The effect of the change in accounting
principle has been treated as a change in accounting principle that is
inseparable from the effect of the change in accounting estimate. As a result,
the entire amount has been treated as a change in accounting estimate. The
effect of this charge was to reduce net earnings by $45.8 million, or $.44 per
common share in 1995.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Annual Report that are subject
to risks and uncertainties. Forward-looking statements include the information
concerning future results of operations of CVS after completion of the merger
with Revco; the information concerning CVS' ability to continue to achieve
significant sales growth; the information concerning CVS' ability to continue to
reduce selling, general and administrative expenses as a percentage of net
sales; the information concerning CVS' intention to sell a certain note
receivable in 1997; and the information concerning CVS' intention to sell its
remaining 32.5% ownership interest in Linens 'n Things, Inc. in 1997; 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 Annual Report (including in the
notes to the consolidated financial statements included herein) and in our
Annual Report on Form 10-K for the year ended December 31, 1996, could affect
the future results of CVS and could cause those results to differ materially
from those expressed in our forward-looking statements: materially adverse
changes in economic conditions generally or in the markets served by CVS;
material changes in inflation; a significant delay in the expected closing of
the merger with Revco; future regulatory actions affecting the chain-drug
industry; competition from other drugstore chains, from alternative distribution
channels such as supermarkets, mass merchants, 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 CVS, including: risks relating to CVS' ability to combine the
businesses of CVS and Revco and the challenges inherent in diverting CVS'
management focus and resources from other strategic opportunities and from
operational matters for an extended period of time during the integration
process; CVS' ability to continue to secure suitable new store locations on
favorable lease terms, CVS' ability to continue to purchase inventory on
favorable terms; and CVS' ability to attract, hire and retain suitable
pharmacists and management personnel.
33
<PAGE> 8
Management's Responsibility for Financial Reporting
The integrity and objectivity of the financial statements and related financial
information in this report are the responsibility of the management of the
Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting controls is continually reviewed
by management and improved and modified as necessary in response to changing
business conditions and recommendations of the Company's internal auditors and
independent auditors.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with management, internal auditors and the
independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The internal auditors and independent auditors have free
access to the Audit Committee.
KPMG Peat Marwick LLP, certified public accountants, are engaged to audit the
consolidated financial statements of the Company. Their Independent Auditors'
Report, which is based on an audit made in accordance with generally accepted
auditing standards, expresses an opinion as to the fair presentation of these
financial statements.
/s/ Stanley P. Goldstein
- ----------------------------------
Stanley P. Goldstein
Chairman of the Board and Chief Executive Officer
/s/ Thomas M. Ryan
- ----------------------------------
Thomas M. Ryan
Vice Chairman and Chief Operating Officer
/s/ Charles C. Conaway
- ----------------------------------
Charles C. Conaway
Executive Vice President and Chief Financial Officer
February 6, 1997
34
<PAGE> 9
Independent Auditors' Report
To the Board of Directors and Shareholders of CVS Corporation:
We have audited the accompanying consolidated balance sheets of CVS Corporation
as of December 31, 1996 and 1995 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the financial position of CVS Corporation at
December 31, 1996 and 1995 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in notes to consolidated financial statements, the Company has
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
effective October 1, 1995.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
Providence, Rhode Island
February 6, 1997
35
<PAGE> 10
<TABLE>
Consolidated Statements of Operations
CVS Corporation
===============================================================================================================================
<CAPTION>
Years Ended December 31,
In millions, except per share amounts 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $5,528.1 $4,865.0 $4,330.1
Cost of goods sold, buying and warehousing costs 3,978.1 3,506.4 3,088.2
- -------------------------------------------------------------------------------------------------------------------------------
Gross margin 1,550.0 1,358.6 1,241.9
Selling, general and administrative expenses 1,174.1 1,113.3 994.4
Depreciation and amortization 76.3 71.1 63.7
Restructuring and asset impairment charges -- 165.6 --
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,250.4 1,350.0 1,058.1
- -------------------------------------------------------------------------------------------------------------------------------
Operating profit 299.6 8.6 183.8
Gain on sale of securities 121.4 -- --
Dividend income 5.6 -- --
Interest expense, net (23.2) (53.5) (30.8)
- -------------------------------------------------------------------------------------------------------------------------------
Other income (expense), net 103.8 (53.5) (30.8)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before income taxes 403.4 (44.9) 153.0
Income tax (provision) benefit (163.8) 18.4 (62.7)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 239.6 (26.5) 90.3
Discontinued operations:
(Loss) earnings from operations, net of income tax benefit (provision) of
$31.0, $171.4 and $(156.0) in 1996, 1995 and 1994, respectively and minority
interest of $51.9 in 1994 (54.8) (607.4) 217.2
Estimated loss on disposal, net of income tax benefit of $56.2 and $9.9 and
minority interest of $22.2 and $38.4 in 1996 and 1995, respectively (109.4) (23.2) --
- -------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings from discontinued operations (164.2) (630.6) 217.2
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 75.4 (657.1) 307.5
Preferred dividends, net (14.5) (17.0) (17.0)
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) available to common shareholders $ 60.9 $ (674.1) $ 290.5
===============================================================================================================================
PER COMMON SHARE:
Earnings (loss) from continuing operations $ 2.12 $ (.41) $ .70
(Loss) earnings from discontinued operations (1.55) (6.00) 2.05
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ .57 $ (6.41) $ 2.75
===============================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 105.7 105.1 105.5
===============================================================================================================================
DIVIDENDS PER COMMON SHARE $ .44 $ 1.52 $ 1.52
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 11
<TABLE>
Consolidated Balance Sheets
CVS Corporation
================================================================================
<CAPTION>
December 31,
In millions 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 423.9 $ 129.6
Investments 179.4 175.0
Accounts receivable, net 160.8 296.4
Inventories 1,031.4 1,673.0
Prepaid expenses 177.2 286.0
- --------------------------------------------------------------------------------
Total current assets 1,972.7 2,560.0
Property and equipment, net 606.5 1,114.4
Deferred charges and other assets 131.9 91.6
Goodwill, net 120.7 195.6
- --------------------------------------------------------------------------------
Total assets $2,831.8 $3,961.6
================================================================================
Liabilities:
Accounts payable $ 507.7 $ 690.7
Accrued expenses 639.9 1,039.8
Notes payable -- 52.0
Federal income taxes 16.1 --
Other current liabilities 18.2 15.2
- --------------------------------------------------------------------------------
Total current liabilities 1,181.9 1,797.7
Long-term debt 303.7 327.7
Deferred income taxes 20.6 9.1
Other long-term liabilities 80.5 184.2
Minority interest in subsidiaries -- 93.8
Redeemable preferred stock -- 1.3
Shareholders'equity:
Preference stock 298.6 334.9
Common stock 1.1 111.7
Treasury stock (273.2) (304.6)
Guaranteed ESOP obligation (292.1) (309.7)
Capital surplus 199.1 54.9
Retained earnings 1,314.0 1,660.4
Other (2.4) .2
- --------------------------------------------------------------------------------
Total shareholders' equity 1,245.1 1,547.8
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,831.8 $3,961.6
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 12
<TABLE>
Consolidated Statements of Shareholders' Equity
CVS Corporation
====================================================================================================================================
<CAPTION>
Years Ended December 31,
Shares Dollars
---------------------------- -------------------------------
In millions 1996 1995 1994 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERENCE STOCK:
Beginning of year 6.3 6.4 6.5 $ 334.9 $ 340.9 $ 347.3
Conversion to common stock (.7) (.1) (.1) (36.3) (6.0) (6.4)
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 5.6 6.3 6.4 298.6 334.9 340.9
====================================================================================================================================
COMMON STOCK:
Beginning of year 111.6 111.4 111.2 111.7 111.5 111.3
Stock options exercised and
awards under stock plans .8 .2 .2 .8 .2 .2
Effect of change in par value -- -- -- (111.4) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 112.4 111.6 111.4 1.1 111.7 111.5
====================================================================================================================================
TREASURY STOCK:
Beginning of year (6.5) (5.8) (5.9) (304.6) (283.8) (289.7)
Repurchase of common stock -- (.8) -- -- (26.3) --
Conversion of preference stock .7 .1 .1 31.7 5.5 5.9
Other -- -- -- (.3) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of year (5.8) (6.5) (5.8) (273.2) (304.6) (283.8)
====================================================================================================================================
GUARANTEED ESOP OBLIGATION:
Beginning of year (309.7) (328.1) (328.6)
Reduction of guaranteed ESOP obligation 17.6 18.4 .5
- ------------------------------------------------------------------------------------------------------------------------------------
End of year (292.1) (309.7) (328.1)
====================================================================================================================================
CAPITAL SURPLUS:
Beginning of year 54.9 48.1 42.1
Conversion of preference stock 4.6 .5 .5
Stock options exercised and awards under stock plans 27.4 6.3 5.5
Issuance of additional shares due to Footstar Distribution .8 -- --
Effect of change in par value 111.4 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 199.1 54.9 48.1
====================================================================================================================================
RETAINED EARNINGS:
Beginning of year 1,660.4 2,494.4 2,364.3
Net earnings (loss) 75.4 (657.1) 307.5
Dividends:
Preference stock, net (14.4) (16.9) (16.9)
Redeemable preferred stock (.1) (.1) (.1)
Common stock (46.5) (159.9) (160.4)
Footstar Distribution (360.8) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 1,314.0 1,660.4 2,494.4
====================================================================================================================================
OTHER:
Beginning of year .2 (1.4) --
Cumulative translation adjustment (.2) 1.6 (1.4)
Unrealized loss on investments, net (2.4) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of year (2.4) .2 (1.4)
====================================================================================================================================
TOTAL SHAREHOLDERS' EQUITY $1,245.1 $1,547.8 $2,381.6
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 13
<TABLE>
Consolidated Statements of Cash Flows
CVS Corporation
==============================================================================================================================
<CAPTION>
Years Ended December 31,
In millions 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 75.4 $(657.1) $ 307.5
Adjustments required to reconcile net earnings (loss)
to net cash provided by operating activities:
Restructuring and asset impairment charges 235.0 982.4 --
Depreciation and amortization 133.7 228.3 206.3
Gain on sale of securities (121.4) -- --
Minority interest in net earnings 22.2 38.4 51.9
Income from unconsolidated subsidiary (4.5) -- --
Deferred income taxes and other non-cash items 84.1 (130.3) 2.0
Change in assets and liabilities, excluding acquisitions and dispositions:
Decrease (increase) in accounts receivable, net 37.0 (30.0) (15.0)
(Increase) in inventories (247.6) (214.3) (266.1)
(Increase) in prepaid expenses, deferred charges and other assets (98.9) (21.5) (14.1)
Increase in accounts payable 293.0 179.1 74.0
(Decrease) increase in accrued expenses (257.4) 46.4 51.8
(Decrease) increase in Federal incomes taxes payable and other liabilities (16.9) (75.9) 100.1
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 133.7 345.5 498.4
==============================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (224.4) (395.0) (421.4)
Proceeds from sale of divisions and other property and equipment 240.4 423.6 86.9
Proceeds from initial public offering of Linens 'n Things, Inc. 189.4 -- --
Proceeds from sale of securities 296.4 -- --
Acquisitions, net of cash -- (4.8) (36.6)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 501.8 23.8 (371.1)
==============================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid or payable (132.2) (240.0) (225.5)
(Reductions in) additions to notes payable (52.0) (148.0) 110.0
(Decrease) increase in book overdrafts (170.3) 65.8 26.9
Repurchase of common stock -- (26.3) --
Reductions of long-term debt and obligations under capital leases (13.3) (10.5) (4.4)
Proceeds from exercise of stock options and other issuances of stock 27.9 .7 --
Other (1.3) 1.6 1.7
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (341.2) (356.7) (91.3)
==============================================================================================================================
Net increase in cash and cash equivalents 294.3 12.6 36.0
Cash and cash equivalents at beginning of year 129.6 117.0 81.0
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $423.9 $ 129.6 $ 117.0
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 14
Notes to Consolidated Financial Statements
CVS Corporation
1 SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--CVS Corporation ("CVS" or the "Company"), formerly known as Melville
Corporation ("Melville"), primarily operates as a single business segment, 1,408
retail drugstores in 13 Northeast and Middle Atlantic states, Georgia and the
District of Columbia. CVS offers customers convenience, selection, and superior
customer service as well as comprehensive prescription and pharmacy services.
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated.
As a result of the Company's strategic restructuring plan, the results of
operations of the former (i) footwear segment (which includes the Meldisco,
Footaction and Thom McAn divisions), (ii) apparel segment (which includes the
Marshalls, Wilsons, and Bob's divisions) and (iii) toys and home furnishings
segment (which includes the Kay-Bee Toys, This End Up and Linens 'n Things
divisions) have been classified as discontinued operations in the accompanying
consolidated statements of operations for all periods presented.
At December 31, 1996, the Company continues to own 32.5% of its former
wholly-owned subsidiary Linens 'n Things, Inc. This investment is being
accounted for using the equity method. The Company has announced its intention
to dispose of, subject to market conditions, its remaining ownership interest in
Linens 'n Things, Inc. during 1997. As a result, this investment has been
classified as a current asset in the accompanying December 31, 1996 consolidated
balance sheet.
See Note 2 for further information about the Company's strategic restructuring
program.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents, which consist of cash and
temporary investments with maturities of three months or less when purchased,
are stated at cost which approximates market.
INVENTORIES--Inventories are stated at the lower of cost or market using the
first-in, first-out ("FIFO") method. At December 31, 1995, certain inventories
at the Kay-Bee Toys, Thom McAn and This End Up divisions were accounted for
using the last-in, first out (LIFO) method. As discussed in Note 2, these
divisions were disposed of during 1996.
PROPERTY AND EQUIPMENT--Depreciation of property and equipment is computed on a
straight line basis, generally over the estimated useful lives of the assets or,
when applicable, the life of the lease, whichever is shorter. Estimated useful
lives generally range from 10 to 40 years for buildings and improvements, 5 to
10 years for fixtures and equipment, and 5 to 10 years for leasehold
improvements.
IMPAIRMENT OF LONG-LIVED ASSETS--An impairment loss is recognized whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company primarily groups and evaluates assets at an
individual store level, which is the lowest level at which independent cash
flows can be identified. When evaluating assets for potential impairment, the
Company considers historical performance and, in addition, estimates future
results. If the carrying amount of the related assets exceed the expected future
cash flows, the Company considers the assets to be impaired and records an
impairment loss.
DEFERRED CHARGES AND OTHER ASSETS--Deferred charges, consisting primarily of
beneficial leasehold costs, are amortized on a straight-line basis, over the
remaining life of the leasehold acquired. Other assets primarily include notes
receivable that were received as a portion of the proceeds from the sale of
certain former divisions. The Company intends to hold these notes until
maturity.
GOODWILL--Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair value. It is amortized on a straight-line basis
generally over periods of forty years. Accumulated amortization was $22.3
million at December 31, 1996 and $28.2 million at December 31, 1995. The Company
evaluates goodwill for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. In completing its
evaluation, the Company compares estimated future cash flows to the carrying
amount of goodwill. If the carrying amount of goodwill exceeds the expected
future cash flows, the Company considers the goodwill to be impaired and records
an impairment loss.
40
<PAGE> 15
FINANCIAL INSTRUMENTS--The Company's financial instruments primarily include
cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses. Due to the short-term nature of these financial instruments, the
Company's carrying value approximates fair value.
MAINTENANCE AND REPAIRS--Maintenance and repair costs are charged directly to
expense as incurred. Major renewals or replacements that substantially extend
the useful life of an asset are capitalized and depreciated.
STORE OPENING AND CLOSING COSTS--New store opening costs are charged directly to
expense as incurred. In the event a store closes before its lease expires, the
remaining lease obligation, less anticipated sublease rental income, is provided
for in the year of closing.
ADVERTISING COSTS--External costs incurred to produce media advertising are
charged to expense when the advertising takes place.
FEDERAL INCOME TAXES--The Company and its wholly-owned subsidiaries file a
consolidated Federal income tax return. The tax benefit for dividends on
unallocated shares of Series One ESOP Convertible Preference Stock is recorded
as a credit to retained earnings.
POSTRETIREMENT BENEFITS--The annual cost of postretirement benefits is funded in
the period incurred and the cost is recognized over an employee's term of
service with the Company.
EARNINGS PER COMMON SHARE--Primary earnings per share is computed by dividing
(i) net earnings, after deducting net dividends on redeemable preferred stock
and ESOP preference stock ("Primary Earnings") by (ii) the weighted average
number of common shares outstanding during the year assuming the exercise of
stock options ("Primary Shares").
Fully diluted earnings per share assumes that the ESOP preference stock is
converted into common stock. Fully diluted earnings per share is computed by
dividing (i) Primary 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) Primary Shares
plus the number of additional common shares that would be issued upon the
conversion of the ESOP preference stock. Fully diluted earnings per share
presentation is not required on the face of the consolidated statements of
operations due to the results of the materiality tests mandated by Accounting
Principles Board ("APB") Opinion No. 15, "Earnings Per Share."
ACCOUNTING CHANGES--Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." While Statement of Financial
Accounting Standards ("SFAS") No. 123 established financial accounting and
reporting standards for stock-based employee compensation plans using a fair
value method of accounting, it allows companies to continue to measure
compensation using the intrinsic value method of accounting as prescribed in APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company will
continue to use its present APB No. 25 accounting treatment for stock-based
compensation. See Note 14 for further information about SFAS No. 123.
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and recorded a pre-tax asset impairment charge of $110.4 million ($5.0
million of which pertained to continuing operations) in connection with the
write-down of certain fixed and intangible assets. The above charge resulted
when the Company began identifying and measuring impairment at a lower level
under SFAS No. 121 than under its previous accounting policy. Under the
Company's previous policy, each of the Company's operating divisions'
long-lived assets were evaluated as a group for impairment at the division
level if the division was either incurring operating losses or was expecting to
incur operating losses in the future. Since the expected future cash flows
measured at the division level were in excess of the carrying value of the
related divisional assets, no previous impairment losses were recorded.
During the fourth quarter of 1995, the Company changed its policy from
capitalizing internally developed software costs to expensing the costs as
incurred and recorded a charge of $74.5 million ($37.8 million of which
pertained to continuing operations). The effect of the change in accounting
principle has been treated as a change in accounting principle that is
inseparable from the effect of the change in accounting estimate. As a result,
the entire amount has been treated as a change in accounting estimate. The
effect of this charge was to reduce net earnings by $45.8 million, or $.44 per
common share in 1995.
RECLASSIFICATIONS--Certain reclassifications have been made to the consolidated
financial statements of prior years to conform to the 1996 presentation.
41
<PAGE> 16
2 STRATEGIC RESTRUCTURING PROGRAM
THE 1995 PLAN
On October 24, 1995 (the "1995 Measurement Date"), the Board of Directors
approved a comprehensive restructuring plan that was the product of a strategic
review initiated in 1994. The restructuring plan included, among other things,
(i) the continued operation of CVS (which includes CVS, and initially the
Linens 'n Things and Bob's divisions), (ii) the disposal of the Marshalls,
Kay-Bee Toys, Wilsons and This End Up divisions, (iii) the spin-off of Footstar,
Inc. ("Footstar"), which includes the Meldisco, Footaction and Thom McAn
divisions, and (iv) the elimination of certain corporate overhead costs.
In connection with the approval of the 1995 Plan, the Company recorded a pre-tax
charge of $872.0 million in the fourth quarter of 1995 (the "1995 Charge") and
discontinued the footwear segment in accordance with APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." As a result of the 1996 Plan discussed below, the
apparel segment and toys and home furnishings segment were also discontinued.
Accordingly, the portion of the 1995 Charge that pertains to these segments,
$711.4 million, is reflected as a component of discontinued operations, and the
remainder, $160.6 million, is included in continuing operations. The amount
recorded in continuing operations primarily includes costs associated with (i)
exiting certain geographic markets, (ii) closing duplicate warehouse facilities
and (iii) closing Melville's Corporate Headquarters. These costs primarily
include asset write-offs, closed store and warehouse lease liabilities and
employee severance. Management determined the amount of (i) asset write-offs by
comparing the carrying value of the assets to be disposed of to the anticipated
proceeds, (ii) closed store and warehouse lease liabilities by calculating the
present value of the future minimum lease payments and (iii) employee severance
based on an employee's compensation and years of service with the Company. The
Company applied the provisions of EITF 94-3 to determine the appropriate
accounting treatment for these charges.
Asset write-offs included in the 1995 Charge totaled $659.7 million. The balance
of the charge, $212.3 million, will require cash outlays of which $85.7 million
had been incurred as of December 31, 1996. The remaining cash outlays are
expected to be incurred primarily in 1997.
In connection with various components of the 1995 Plan, positions for
approximately 1,200 store employees and 400 administrative employees have been
eliminated.
At December 31, 1996, the 1995 Plan had been completed without significant
changes to the Board approved plan. As a result, the Company expects that
earnings from continuing operations before income taxes will improve by
approximately $38 million on an annual basis (projected 1997 versus 1995)
primarily due to the elimination of certain corporate overhead costs.
The 1996 Plan
On May 29, 1996 (the "1996 Measurement Date"), the Board of Directors approved
further refinements to the restructuring plan. The refinements included (i) a
formal plan to separate the Linens 'n Things and Bob's divisions from CVS and
(ii) a formal plan to convert 80 to 100 of Thom McAn's stores to the Footaction
store format and to exit the Thom McAn business by mid-1997.
In connection with the approval of the 1996 Plan, the Company recorded, as a
component of discontinued operations, a pre-tax charge of $235.0 million during
the second quarter of 1996 (the "1996 Charge"), substantially all of which
related to asset write-offs that will not require net cash outlays. As a result
of adopting the plan to separate the Linens 'n Things and Bob's divisions from
CVS, the apparel and toys and home furnishings segments were discontinued in
accordance with APB Opinion No. 30.
The Company expects that the 1996 Plan will be completed during 1997 without
significant changes to the Board approved plan.
The asset write-offs of $659.7 million and $235.0 million included in the 1995
Charge and 1996 Charge, respectively, primarily relate to the write-down of the
operating divisions to be disposed of to estimated fair value. The significant
judgement included in the above write-offs relates to the estimation of fair
value for each division. These estimates were prepared by independent third
parties.
THE DISPOSALS
On November 17, 1995, the Company completed the sale of the Marshalls division
to The TJX Companies, Inc. for total proceeds of approximately $600 million.
On May 4, 1996, the Company completed the sale of the Kay-Bee Toys division to
Consolidated Stores Corporation for total proceeds of approximately $285.7
million.
On May 25, 1996, the Company completed the sale of the Wilsons division to an
investor group led by Wilsons' management for total proceeds of approximately
$69.7 million.
On May 31, 1996, the Company completed the sale of the This End Up division to
an investor group for approximately $18.2 million.
42
<PAGE> 17
On October 12, 1996, the Company completed the spin-off of Footstar by
distributing 100% of the shares of Footstar common stock held by CVS to its
shareholders of record as of the close of business on October 2, 1996 (the
"Footstar Distribution"). See Note 20 for further information about the Footstar
Distribution.
On December 2, 1996, the Company completed the initial public offering of 67.5%
of Linens 'n Things, Inc. (the "Linens IPO") for net proceeds of approximately
$189.4 million.
The gain and losses that resulted from the above disposals are reflected in the
"Discontinued Operations" section of the Consolidated Statements of Operations.
The 1996 Charge includes approximately $47 million related to finalizing certain
disposals accrued for in the 1995 Charge. The Company has no continuing
involvement with the divested operations.
OTHER EVENTS
On October 16, 1996, the Company's trading symbol on the New York Stock Exchange
was changed to "CVS" from "MES."
On November 20, 1996, the Company officially changed its name to CVS Corporation
from Melville Corporation.
<TABLE>
Following is a summary of the significant components of the 1995 Charge and the 1996 Charge:
==========================================================================================================================
<CAPTION>
Reserve
1995 Utilized Balance at 1996 Utilized
In millions Charge in 1995(1) 12/31/95(4) Charge in 1996(1)(2)(3)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loss on sale of divisions $587.1 $382.2 $204.9 $134.7 $177.1
Lease obligations and asset write-offs relating to store,
office and warehouse closings 146.7 66.4 80.3 5.7 30.5
Contract termination costs and asset write-offs relating to
outsourcing certain technology functions 64.3 40.3 24.0 -- 19.2
Severance and employee benefits 48.0 .2 47.8 10.6 23.3
Costs relating to the consolidation of the footwear divisions
and exit from Thom McAn 20.0 .4 19.6 84.0 103.6
Other 5.9 5.9 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
$872.0 $495.4 $376.6 $235.0 $353.7
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
==============================================================================
Reserve
Balance at
12/31/96(4)(5)
- ------------------------------------------------------------------------------
<S> <C>
Loss on sale of divisions $162.5
Lease obligations and asset write-offs relating to store,
office and warehouse closings 55.5
Contract termination costs and asset write-offs relating to
outsourcing certain administrative functions 4.8
Severance and employee benefits 35.1
Costs relating to the consolidation of the footwear divisions
and exit from Thom McAn --
Other --
- ------------------------------------------------------------------------------
$257.9
==============================================================================
<FN>
(1) $6.1 million and $79.6 million of the amounts utilized in 1995 and 1996, respectively, required cash outlays.
(2) $80.0 million of the amount utilized in 1996 represents reserve balances that were retained by Footstar.
(3) $2.4 million of the amount utilized in 1996 represents reserve balances that were retained by Linen 'n Things, Inc.
(4) $36.8 million and $12.0 million of the balance at December 31, 1995 and 1996, respectively, is included in
balance sheet classifications other than accrued expenses.
(5) The Company believes that the reserve balance at December 31, 1996 is adequate to cover the remaining costs
associated with the strategic restructuring program.
</TABLE>
The Company believes that the reserve balance at December 31, 1996 is adequate
to cover the remaining costs associated with the strategic restructuring plan.
3 DISCONTINUED OPERATIONS
<TABLE>
Following is a summary of discontinued operations by reporting segment for the
years ended December 31:
<CAPTION>
===========================================================================
In millions 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Footwear $1,391.1 $1,827.3 $1,839.9
Apparel 526.4 3,055.7 3,538.9
Toys and Home Furnishings 900.3 1,768.4 1,576.7
- ---------------------------------------------------------------------------
$2,817.8 $6,651.4 $6,955.5
===========================================================================
Operating (loss) profit:(1)
Footwear $ (12.4) $ 47.5 $ 160.5
Apparel (171.3) (704.0) 161.1
Toys and Home Furnishings (49.7) (115.9) 99.4
- ---------------------------------------------------------------------------
$ (233.4) $ (772.4) $ 421.0
===========================================================================
<FN>
(1) Includes the effect of the 1995 Charge and the 1996 Charge.
</TABLE>
<TABLE>
Following is a summary of the assets and liabilities of discontinued operations
by reporting segment as of December 31:
<CAPTION>
==========================================================================
In millions 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Assets:
Footwear $ -- $ 650.5
Apparel 141.0 313.9
Toys and Home Furnishings -- 811.3
- --------------------------------------------------------------------------
$141.0 $1,775.7
==========================================================================
Liabilities:
Footwear $ -- $ 347.6
Apparel 61.0 125.5
Toys and Home Furnishings -- 356.8
- --------------------------------------------------------------------------
$ 61.0 $ 829.9
==========================================================================
</TABLE>
43
<PAGE> 18
4 ACCOUNTS RECEIVABLE
<TABLE>
Accounts receivable consisted of the following at December 31:
<CAPTION>
=====================================================================
In millions 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Trade $145.1 $159.5
Federal income taxes -- 22.4
Other 25.8 147.9
- ---------------------------------------------------------------------
170.9 329.8
Less allowance for
doubtful accounts (10.1) (33.4)
- ---------------------------------------------------------------------
$160.8 $296.4
=====================================================================
</TABLE>
5 INVESTMENTS
<TABLE>
Investments consisted of the following at December 31:
<CAPTION>
=====================================================================
In millions 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Note receivable $100.0 $ --
Investment in Linens 'n Things, Inc. 83.2 --
TJX preferred stock -- 175.0
- ---------------------------------------------------------------------
183.2 175.0
Unrealized loss on note receivable (3.8) --
- ---------------------------------------------------------------------
$179.4 $175.0
=====================================================================
</TABLE>
The note receivable, which matures on May 4, 2000, was received as a portion of
the proceeds from the sale of the Kay-Bee Toys division. The Company intends to
sell this note to a third party in 1997. At December 31, 1996, the fair market
value of this investment was approximately $96.2 million, which represents the
present value of the expected future cash flows discounted at an interest rate
that the Company considers to be appropriate for a loan that would currently be
offered to a company with comparable credit risk.
As discussed in Notes 1 and 2, the Company continues to own 32.5% of Linens 'n
Things, Inc. At December 31, 1996, the fair market value of this investment was
approximately $123 million based on quoted market prices.
During 1996, the Company completed the sale of the TJX preferred stock for total
proceeds of approximately $296.4 million. The sale of these securities resulted
in a gain of $121.4 million.
Except for the investment in Linens 'n Things, Inc., the above assets are
classified as available-for-sale securities and are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, are reported
as a separate component of shareholders' equity until realized.
6 INVENTORIES
<TABLE>
Inventories consisted of the following at December 31:
<CAPTION>
=======================================================================
In millions 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Finished goods $1,031.4 $1,661.7
Work-in-process -- .8
Raw materials and supplies -- 10.5
- -----------------------------------------------------------------------
$1,031.4 $1,673.0
=======================================================================
</TABLE>
7 PREPAID EXPENSES
<TABLE>
Prepaid expenses consisted of the following at December 31:
<CAPTION>
======================================================================
In millions 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred income taxes $154.8 $228.1
Other 22.4 57.9
- ----------------------------------------------------------------------
$177.2 $286.0
======================================================================
</TABLE>
44
<PAGE> 19
8 PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consisted of the following at December 31:
<CAPTION>
==============================================================================
In millions 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 55.6 $ 56.7
Buildings and improvements 160.9 244.3
Fixtures and equipment 461.4 910.1
Leasehold improvements 237.1 483.3
Capital leases 3.3 13.5
- ------------------------------------------------------------------------------
918.3 1,707.9
Accumulated depreciation and amortization (311.8) (593.5)
- ------------------------------------------------------------------------------
$ 606.5 $1,114.4
==============================================================================
</TABLE>
9 ACCRUED EXPENSES
<TABLE>
Accrued expenses consisted of the following at December 31:
<CAPTION>
==============================================================================
In millions 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Restructuring reserves $245.9 $ 339.8
Taxes other than Federal income taxes 58.9 121.0
Salaries and wages 49.7 70.7
Rent 40.8 78.0
Other 244.6 430.3
- ------------------------------------------------------------------------------
$639.9 $1,039.8
==============================================================================
</TABLE>
10 SHORT-TERM BORROWING ARRANGEMENTS
<TABLE>
Following is a summary of short-term borrowings outstanding at December 31:
<CAPTION>
==========================================================================
In millions 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ -- $ 52.0
Weighted average interest rate -- 5.9%
- --------------------------------------------------------------------------
Lines of credit available $ 320.0 $1,148.0
Letters of credit outstanding $ 11.9 $ 331.4
==========================================================================
</TABLE>
The Company primarily uses commercial paper to finance its seasonal inventory
requirements and capital expenditures. The Company's commercial paper program is
supported by a $320 million, five-year unsecured revolving credit facility. The
Company can also obtain short-term financing through the issuance of bank loan
participation notes.
There were no short-term borrowings outstanding at December 31, 1996. The
Company is not obligated under any formal or informal compensating balance
agreements.
11 LONG-TERM DEBT
<TABLE>
Long-term debt consisted of the following at December 31:
<CAPTION>
======================================================================
In millions 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Guaranteed ESOP note, 8.52%, payable
in various installments through 2008(1) $309.4 $323.0
Other notes and mortgages payable 12.2 19.0
- ----------------------------------------------------------------------
321.6 342.0
Less current installments (17.9) (14.3)
- ----------------------------------------------------------------------
$303.7 $327.7
======================================================================
<FN>
(1) See Note 18 for further information about the Company's ESOP Plan.
</TABLE>
At December 31, 1996, the aggregate long-term debt maturing during each of the
next five years was as follows: $17.9 million in 1997, $21.5 million in 1998,
$13.8 million in 1999, $16.5 million in 2000 and $20.8 million in 2001.
<TABLE>
Following is a summary of net interest expense for the years ended December 31:
<CAPTION>
========================================================================
In millions 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense(1) $30.7 $53.9 $31.8
Less interest income and
capitalized interest (7.5) (.4) (1.0)
- ------------------------------------------------------------------------
Net interest expense $23.2 $53.5 $30.8
========================================================================
<FN>
(1) In accordance with the provisions of Statement of Position 76-3, "Accounting
Practices for Certain Employee Stock Ownership Plans" and allowable under
the transition provisions of Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," interest expense excludes
interest related to the guaranteed ESOP note, but includes interest
recognized in connection with the Company's contribution to the ESOP Plan.
</TABLE>
45
<PAGE> 20
12 LEASES
The Company and its subsidiaries lease retail stores, warehouse facilities and
office facilities over periods generally ranging from 5 to 20 years and
generally has options to renew such terms over periods ranging from 5 to 15
years.
<TABLE>
Following is a summary of the future minimum lease payments under capital
leases, rental payments required under operating leases, and future minimum
sublease rentals, excluding lease obligations for closed stores, at December 31,
1996:
<CAPTION>
======================================================================
Capital Operating
In millions Leases Leases
- ----------------------------------------------------------------------
<S> <C> <C>
1997 $ .6 $ 190.3
1998 .6 183.4
1999 .6 171.2
2000 .4 161.8
2001 .4 148.4
Thereafter 1.6 908.3
- ----------------------------------------------------------------------
$ 4.2 $1,763.4
Less amount representing interest (2.1)
- ----------------------------------------------------------------------
Present value of minimum lease payments $ 2.1
======================================================================
Total future minimum sublease rentals $ -- $ 30.8
======================================================================
</TABLE>
<TABLE>
Following is a summary of net rental expense for operating leases relating to
continuing operations for the years ended December 31:
<CAPTION>
===============================================================================
In millions 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $176.0 $170.7 $154.1
Contingent rentals based on sales 30.2 25.2 21.9
- -------------------------------------------------------------------------------
206.2 195.9 176.0
Less sublease rentals (10.1) (7.7) (7.7)
- -------------------------------------------------------------------------------
$196.1 $188.2 $168.3
===============================================================================
</TABLE>
13 CONTINGENCIES
In connection with certain dispositions completed between 1991 and 1996, the
Company continues to guarantee lease obligations for approximately 2,600 former
stores. The Company is indemnified for these obligations by the respective
purchasers. Assuming that each respective purchaser became insolvent, an event
which the Company believes to be highly unlikely, management estimates that it
could settle these obligations for approximately $1.3 billion at December 31,
1996. In the opinion of management, the ultimate disposition of these guarantees
will not have a material adverse effect on the Company's consolidated financial
condition, results of operations or future cash flows.
The Company is also a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management and the Company's outside
counsel, the ultimate disposition of these lawsuits, exclusive of potential
insurance recoveries, will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or future cash flows.
14 STOCK INCENTIVE PLANS
As discussed in Note 1, the Company applies APB Opinion No. 25 and related
interpretations to account for its stock incentive plans. Pro forma disclosures
as if the Company adopted the cost recognition requirements of SFAS No. 123 are
presented below.
The Company's 1990 Omnibus Stock Incentive Plan (the "Omnibus Plan"), as
amended, provides for the granting of up to 9,238,942 shares of common stock to
key employees in the form of options, restricted stock and other stock-based
awards. In 1996, the maximum number of shares available for grant was adjusted
for the effect of the Footstar Distribution. The Omnibus Plan replaced the
Company's 1973 and 1987 Stock Option Plans and the 1980 Restricted Stock Plan
(collectively, the "Previous Employee Plans").
Stock options granted under the Omnibus Plan are awarded at fair market value on
the date of the grant. The right to exercise these options generally commences
between one and three years from the date of the grant and expires ten years
after the date of the grant, provided that the option holder continues to be
employed by the Company.
The 1996 Directors Stock Plan (the "1996 Directors Plan"), provides for the
granting of up to 173,230 shares of common stock to the Company's non-employee
directors (the "Eligible Directors"). In 1996, the maximum number of shares
available for grant was adjusted for the effect of the Footstar Distribution.
Eligible Directors (i) are entitled to receive an annual grant of
46
<PAGE> 21
347 shares of common stock, (ii) are paid one-half of their annual retainer fee
in shares of common stock and (iii) may elect to receive common stock as
compensation for certain other services rendered. In addition, Eligible
Directors may elect to defer compensation payable in common stock until their
service as a director concludes. In this case, Eligible Directors are entitled
to receive dividend equivalent credits on their deferred shares. The 1996
Directors Plan replaced the Company's 1989 Directors Stock Option Plan (the
"Previous Directors Plan").
In connection with the termination of certain retirement benefits, the 1996
Directors Plan provided each Eligible Director the option to receive the
actuarial present value of these benefits in the form of a common stock grant in
lieu of receiving the previously accrued benefit in pension payments upon
retirement. All Eligible Directors elected to receive the common stock grant and
to defer the grant until their service as a director concludes. The impact of
this grant was not material to the results of operations.
<TABLE>
Following is a summary of the activity in the Omnibus Plan, the 1996 Directors Plan, the Previous Employee Plans and the
Previous Directors Plan:
<CAPTION>
1996 1995 1994
--------------------------- ----------------------------- ------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,616,005 $35.27 4,143,867 $38.08 4,008,084 $38.12
Granted 1,108,673 33.45 3,519,719 31.89 232,128 32.35
Exercised (910,640) 30.78 (20,095) 27.16 (88,261) 24.57
Canceled (2,210,456) 37.58 (27,486) 32.37 (8,084) 38.97
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,603,582 $34.73 7,616,005 $35.27 4,143,867 38.08
- -------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 3,403,940 4,108,217 3,925,594
===============================================================================================================================
</TABLE>
<TABLE>
Following is a summary of fixed stock options outstanding at December 31, 1996:
<CAPTION>
====================================================================================================================
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------- -------------------------------
Weighted-Average
Remaining
Range of Number Years of Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$23.14 to 35.72 4,128,253 7.59 $32.53 1,928,611 $32.11
36.85 to 39.72 786,632 5.76 39.14 786,632 39.14
40.05 to 47.41 688,697 4.71 42.85 688,697 42.85
- --------------------------------------------------------------------------------------------------------------------
$23.14 to 47.41 5,603,582 6.98 $34.73 3,403,940 $35.91
====================================================================================================================
</TABLE>
The number of shares and the weighted-average exercise prices included in the
above tables have been restated to reflect the effect of the Footstar
Distribution.
At December 31, 1996, approximately 1.6 million of the 5.6 million stock options
outstanding were held by employees of divisions sold or to be sold, or by
employees terminated under the Company's strategic restructuring program. These
individuals may exercise their options for a 90 day period following
termination.
The Omnibus Plan also permits the granting of performance share awards,
representing rights to receive common stock grants based upon certain
performance criteria over a three-year performance period, and performance based
restricted share awards, representing rights to receive common stock grants
based upon certain performance criteria over a one-year performance period.
Compensation expense related to grants under these provisions is based on the
current market price of the Company's common stock and the extent to which the
performance criteria is being met.
47
<PAGE> 22
<TABLE>
Following is a summary of performance shares and performance based restricted
shares for the years ended December 31:
<CAPTION>
================================================================================
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Units awarded -- 32,297 77,376
Fair market value of units awarded -- $1.2 $2.9
Shares granted related to units
previously awarded 35,380 60,807 42,051
Fair market value of shares granted $1.3 $2.2 $1.6
================================================================================
</TABLE>
The weighted-average grant date fair value of performance shares and performance
based restricted shares granted in 1996, 1995 and 1994 was $37.01, $35.79 and
$37.19, respectively.
Restricted stock awards are currently granted under the Omnibus Plan only in
connection with the hiring or retention of key executives and are subject to
certain conditions. Restrictions are lifted generally three or four years after
the date of grant, provided that the executive continues to be employed by the
Company.
<TABLE>
Following is a summary of restricted stock awards for the years ended December
31:
<CAPTION>
================================================================================
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares granted 52,042 112,773 55,050
Fair market value of shares granted $1.8 $4.1 $1.9
Shares canceled 58,680 11,452 1,535
================================================================================
</TABLE>
The weighted-average grant date fair value of restricted stock granted in 1996,
1995 and 1994 was $34.93, $32.54 and $34.97, respectively.
At December 31, 1996, there were 3,072,183 shares available for grant under the
Omnibus Plan and 150,078 shares available for grant under the 1996 Directors
Plan.
<TABLE>
Compensation cost recognized in net earnings under the Company's stock-based
compensation plans amounted to $1.4 million in 1996, $3.1 million in 1995 and
$1.4 million in 1994. Had compensation cost for the Company's 1996 and 1995
grants under its stock-based compensation plans been determined consistent with
SFAS No. 123, the Company's net earnings and net earnings per common share for
1996 and 1995 would approximate the pro forma amounts shown below:
<CAPTION>
================================================================================
In millions, except per share amounts 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net earnings (loss):
As reported $ 75.4 $(657.1)
Pro forma 69.8 (662.2)
- --------------------------------------------------------------------------------
Net earnings (loss) per common share:
As reported $ .57 $ (6.41)
Pro forma .52 (6.46)
================================================================================
</TABLE>
The weighted-average grant date fair value of options granted during 1996 and
1995 was $10.07 and $8.01 per option, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1996 and 1995: a dividend yield of
1.07%; an expected volatility of 20.51%, a risk free interest rate of 7.0% and
an expected life of 5.0 years and 4.1 years, respectively. The effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative of future
amounts. SFAS No. 123 does not apply to awards prior to 1995.
15 Capital Structure
On November 20, 1996, the Company changed its state of incorporation from New
York to Delaware. The Certificate of Incorporation of CVS provides for the
authorization of 350,120,619 shares of capital stock of which 300,000,000 shares
are common stock, $.01 par value per share, 120,619 are cumulative preferred
stock, $.01 par value per share and 50,000,000 shares are preference stock,
$1.00 par value per share.
In connection with managing the Company's stock incentive plans, 842,900 shares
of common stock were reacquired in 1995 at a cost of $26.3 million. No shares
were reacquired in 1996.
48
<PAGE> 23
16 REDEEMABLE PREFERRED STOCK
At December 31, 1995, 17,269 shares of cumulative preferred stock, Series B,
$4.00 dividend, redeemable at $100 plus accrued dividends were issued and
outstanding. During 1996, the Company redeemed these shares at a cost of $1.3
million plus accrued dividends.
17 POSTRETIREMENT BENEFITS
The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.
The weighted average discount rate used to determine the accumulated
postretirement benefit obligation (the "APBO") was 7.5% and 6.9% at December 31,
1996 and 1995, respectively.
<TABLE>
Following is a summary of the accrued postretirement benefit cost at December
31:
<CAPTION>
=====================================================================
In millions 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Retirees $3.8 $16.6
Fully eligible active plan participants .1 1.4
Other active plan participants .1 10.8
- ---------------------------------------------------------------------
APBO 4.0 28.8
Unrecognized prior service gain 1.2 13.1
Unrecognized net gain 1.7 8.0
- ---------------------------------------------------------------------
Accrued postretirement benefit cost $6.9 $49.9
=====================================================================
</TABLE>
In 1992, the Company amended these plans to terminate certain benefits. The
amendment resulted in a prior service gain of $16.7 million. The prior service
gain is being amortized over 13 years. The decrease in the accrued
postretirement benefit cost from December 31, 1995 to December 31, 1996 is
primarily due to the Footstar Distribution.
<TABLE>
Following is a summary of the net periodic cost recorded for the years ended
December 31:
<CAPTION>
====================================================================
In millions 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $1.6 $2.0 $2.0
Service cost(1) (.7) (.9) (.5)
- --------------------------------------------------------------------
$ .9 $1.1 $1.5
====================================================================
<FN>
(1) Net of prior service gain amortization.
</TABLE>
For measurement purposes, a 9.3% increase in the cost of covered healthcare
benefits was assumed for 1996. The rate was assumed to decline gradually to 5%
in 2005, and remain level thereafter. A one percent increase in the healthcare
cost trend would increase the APBO by $.3 million at December 31, 1996 and the
annual expense for 1996 by $.03 million.
18 EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution plan for full-time employees which
includes its Employee Stock Ownership Plan (the "ESOP").
In 1989, the ESOP Trust borrowed $357.5 million through a 20-year loan that is
guaranteed by the Company. The proceeds from the loan were used to purchase
6,688,494 shares of ESOP convertible preference stock from the Company. The
original liquidation value of the ESOP convertible preference stock ($53.45) is
guaranteed by the Company. Each share of ESOP convertible preference stock is
convertible into 1.157 shares of common stock. The total number of new shares to
be allocated each year is calculated by multiplying (i) the ratio of each year's
debt service payment to total current and future debt service payments by (ii)
the number of unallocated shares of ESOP preference stock in the plan. At
December 31, 1996, 5.6 million shares were outstanding, of which, 1.2 million
shares were allocated to participants, .4 million shares were committed to be
released and the remaining 4.0 million shares were held in the ESOP Trust for
future allocations. At December 31, 1996, the fair value of the allocated shares
was approximately $64 million. The Company is required to repurchase at the
original liquidation value, for cash or common stock at the Company's option,
the ESOP convertible preference stock allocated to participants upon
distribution to the participant. Dividends are cumulative at the stated rate or
the common rate if higher.
49
<PAGE> 24
<TABLE>
Following is a summary of the ESOP for the years ended December 31:
<CAPTION>
=============================================================================
In millions 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends paid $21.8 $49.2 $ --
Dividends accrued -- -- 24.9
Annual dividends 21.8 24.3 24.9
Tax benefit of annual dividends 8.8 9.8 10.0
Cash contributions 19.3 14.2 11.1
Interest costs incurred by
the ESOP Trust 27.5 28.4 29.0
Compensation expense recognized(1) 3.4 6.2 5.9
Interest expense recognized(1) 12.0 6.4 5.3
=============================================================================
<FN>
(1) Amounts include discontinued operations.
</TABLE>
The Company's contribution to the ESOP, plus the dividends paid on the ESOP
convertible preference stock held by the ESOP Trust, are used to repay the loan
principal and interest. The Company has reflected the guaranteed ESOP obligation
as long-term debt on the consolidated balance sheets. The ESOP obligation is
collateralized by the unallocated shares of ESOP convertible preference stock. A
corresponding amount of "Guaranteed ESOP obligation" is recorded as a reduction
of shareholders' equity. The ESOP convertible preference stock is not considered
when computing primary earnings per share, but is considered when computing
fully diluted earnings per share. In connection with the Company's strategic
restructuring program, approximately 300,000 shares of ESOP convertible
preference stock will be converted to common stock in 1997. Based on the market
price of the Company's common stock at December 31, 1996, these conversions will
result in an expense of $3.5 million. This expense was provided for in the 1995
restructuring charge.
19 401 (K) PROFIT SHARING PLAN
The Company has a qualified 401(k) Profit Sharing Plan available to full-time
employees who meet the plan's eligibility requirements. This plan, which is also
a defined contribution plan, contains a profit sharing component that makes tax
deferred contributions to each employee based on certain performance criteria.
The plan permits employees to make contributions up to the maximum limits
allowed by Internal Revenue Code Section 401(k). Under the 401(k) component,
the Company matches a portion of the employee's contribution under a
predetermined formula based on the employee's contribution level and years of
vesting service. Company contributions to the plan for both profit sharing and
matching employee contributions totaled $22.4 million, $21.7 million and $18.0
million in 1996, 1995 and 1994, respectively. These amounts include
contributions made on behalf of employees of the Company's former divisions.
20 INCOME TAXES
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
<TABLE>
Following is a summary of the significant components of the Company's deferred
tax assets and liabilities as of December 31:
<CAPTION>
======================================================================
In millions 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Property and equipment $ 57.5 $112.5
Employee benefits 57.6 75.9
Inventories 6.9 22.7
Other assets 12.2 7.8
- ----------------------------------------------------------------------
Total deferred tax assets 134.2 218.9
Deferred tax liabilities -- --
- ----------------------------------------------------------------------
Net deferred tax assets $134.2 $218.9
======================================================================
</TABLE>
Based on historical pre-tax earnings, the Company believes it is more likely
than not that the deferred tax assets will be realized.
<TABLE>
The Company's income tax (provision) benefit for continuing operations for the
years ended December 31 consisted of the following:
<CAPTION>
=====================================================================
In millions 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Federal $(129.6) $14.6 $(47.7)
State (34.2) 3.8 (15.0)
- ---------------------------------------------------------------------
$(163.8) $18.4 $(62.7)
=====================================================================
</TABLE>
The income tax (provision) benefit includes a net deferred tax benefit of $.2
million and $123.9 million in 1996 and 1995, respectively and a net deferred tax
charge of $15.3 million in 1994.
50
<PAGE> 25
<TABLE>
Following is a reconciliation of the Company's effective tax rate to the U.S.
statutory income tax rates for the years ended December 31:
<CAPTION>
=====================================================================
1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Percent of pre-tax income 40.6% 41.0% 41.0%
State income taxes, net of Federal
tax benefit (5.5) (5.9) (6.4)
Goodwill and other (.1) (.1) .4
- ---------------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
=====================================================================
</TABLE>
As discussed in Note 2, the Company completed the Footstar Distribution on
October 12, 1996. The Company believes that the Footstar Distribution should be
tax-free to the Company and its shareholders, based on a legal opinion provided
by outside counsel. However, since opinions of counsel are not binding on the
Internal Revenue Service or the courts, it could ultimately be determined that
the Footstar Distribution does not qualify as a tax-free distribution. If such
occurred, the Company would be required to recognize a capital gain for tax
purposes equal to the difference between the fair market value of the shares of
Footstar stock distributed and the Company's basis in such shares. The Company,
however, believes the likelihood of the Footstar Distribution not qualifying as
a tax-free distribution to be remote.
21 SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
During the years ended December 31, the Company had the following non-cash
financing activities:
<CAPTION>
============================================================
In millions 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $ -- $ 4.8 $41.8
Cash paid -- 4.8 36.6
- ------------------------------------------------------------
Liabilities assumed $ -- $ -- $ 5.2
- ------------------------------------------------------------
Stock or notes received for
divisions sold $172.4 $175.0 $ --
============================================================
</TABLE>
<TABLE>
Cash payments for income taxes and interest for the years ended December 31 were
as follows:
<CAPTION>
======================================================================
In millions 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Income tax refund (payment) $ 3.8 $(141.5) $(122.4)
Interest, net of amounts capitalized $31.5 $ 55.5 $ 34.1
======================================================================
</TABLE>
22 SUBSEQUENT EVENT (UNAUDITED)
On February 6, 1997, the Company signed a definitive merger agreement to acquire
Revco D.S., Inc. ("Revco") in a stock-for-stock merger valued at approximately
$2.8 billion. CVS will also assume approximately $900 million of existing Revco
debt as part of this transaction.
Under the terms of the merger agreement, CVS will combine with Revco in an
exchange of stock that is expected to qualify for treatment as a pooling of
interests transaction, tax free to Revco shareholders. If the merger is
completed, for each share of Revco common stock held, Revco shareholders will
receive the sum of (i) 0.4692 shares of CVS common stock and (ii) the number of
shares of CVS common stock equal to the quotient obtained by dividing $20 by the
average closing price of CVS common stock during ten trading days randomly
selected out of the twenty trading days ending on the fifth trading day
preceding the closing date (collectively, the "Exchange Ratio"), provided that,
under no circumstances will the Exchange Ratio exceed 1.0097 or be less than
0.8837.
The transaction is subject to approval by the shareholders of both companies,
expiration of the applicable waiting period under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended, and certain other customary
closing conditions. If all the closing conditions have been met, it is expected
that the transaction will be completed by mid-year 1997.
51
<PAGE> 26
23 SUMMARY OF QUARTERLY RESULTS
<TABLE>
<CAPTION>
======================================================================================================================
Unaudited; in millions, except per share amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
1996 $1,258.4 $1,363.5 $1,356.3 $1,549.9
1995 1,128.1 1,202.9 1,170.0 1,364.0
- ----------------------------------------------------------------------------------------------------------------------
Gross margin:
1996 $ 362.0 $ 388.5 $ 374.1 $ 425.4
1995 322.3 342.8 330.4 363.1
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations:
1996 $ 40.6 $ 90.9 $ 44.8 $ 63.3
1995 28.0 33.3 12.8 (100.6)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss):
1996 $ 14.2 $ (62.5) $ 63.6 $ 60.1
1995 (26.4) 30.6 (5.2) (656.1)
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share from continuing operations:
1996 Primary $ .35 $ .83 $ .39 $ .55
1996 Fully diluted .35 .83 .38 .55
1995 .23 .28 .08 (1.00)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share:
1996 Primary $ .10 $ (.62) $ .57 $ .53
1996 Fully diluted .10 (.62) .55 .53
1995 (.29) .25 (.09) (6.28)
======================================================================================================================
</TABLE>
24 MARKET INFORMATION
<TABLE>
CVS Corporation's common stock is listed on the New York Stock Exchange. Its
trading symbol is CVS. Information with respect to quarterly trading ranges
(based on low/high sales prices), dividends paid per share and the number of
record shareholders is summarized as follows:
<CAPTION>
=========================================================================================================
Unaudited 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- ---------------------------------------------------------------------------------------------------------
Market price per share(1):
<S> <C> <C> <C> <C> <C>
1996 $27 1/4-$36 3/8 $35 1/4-$44 1/2 $36 3/8-$46 $36 3/8-$44 3/4 $27 1/4-$46
1995 30 3/8- 37 1/2 33 5/8- 39 7/8 32 3/4- 37 1/4 28 3/8- 37 1/8 28 5/8- 39 7/8
- ---------------------------------------------------------------------------------------------------------
Dividends paid per share:
1996 $.11 $.11 $.11 $.11 $ .44
1995 .38 .38 .38 .38 1.52
- ---------------------------------------------------------------------------------------------------------
Number of common shareholders:
1996 5,700
1995 6,500
=========================================================================================================
<FN>
(1) The stock prices shown in the table above are actual trading prices and do not reflect any adjustment
for the effect of the Footstar Distribution which was completed on October 12, 1996.
</TABLE>
52
<PAGE> 27
<TABLE>
Five-Year Financial Summary
CVS Corporation
<CAPTION>
=========================================================================================================================
Dollars in millions, except per share amounts 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of operations:
Net sales $5,528.1 $4,865.0 $4,330.1 $3,948.2 $3,632.1
Operating profit(1)(2) 299.6 223.6 183.8 177.1 193.8
Earnings (loss) from continuing operations 239.6 (26.5) 90.3 91.9 65.7
Comparable earnings from continuing operations(1)(2)(3) 167.5 100.3 90.3 91.9 100.8
Net earnings (loss) 75.4 (657.1) 307.5 331.8 133.4
Net earnings (loss) available
to common shareholders 60.9 (674.1) 290.5 75.1 85.1
Dividends declared 68.6 184.3 185.4 184.9 180.3
- -------------------------------------------------------------------------------------------------------------------------
Per common share:
Earnings (loss) from continuing operations $ 2.12 $ (.41) $ .70 $ .71 $ .48
Comparable earnings from continuing operations(1)(2)(3) 1.44 .79 .70 .71 .81
Net earnings (loss) .57 (6.41) 2.75 3.00 1.13
Dividends .44 1.52 1.52 1.52 1.48
- -------------------------------------------------------------------------------------------------------------------------
Financial Position:
Current assets $1,972.7 $2,560.0 $2,650.5 $2,384.0 $2,429.8
Total assets 2,831.8 3,961.6 4,735.5 4,258.0 4,202.2
Current liabilities 1,181.9 1,797.7 1,642.7 1,292.7 1,350.5
Total long-term obligations and redeemable
preferred stock 305.6 336.0 351.8 365.9 376.4
- -------------------------------------------------------------------------------------------------------------------------
Percentage of net sales:
Operating profit(1)(2) 5.4% 4.6% 4.2% 4.5% 5.3%
Comparable earnings from continuing operations(1)(2)(3) 3.0 2.1 2.1 2.3 2.8
Net earnings (loss) 1.4 (13.5) 7.1 8.4 3.7
=========================================================================================================================
<FN>
(1) For comparative purposes, operating profit for 1995 excludes the effect of $165.6 million of restructuring and asset
impairment charges and $49.4 million of non-recurring operating charges. Comparable earnings from continuing
operations and comparable earnings per common share from continuing operations for 1995 excludes the after-tax effect
of these charges.
(2) For comparative purposes, operating profit for 1992 excludes the effect of $59.4 million of restructuring charges.
Comparable earnings from continuing operations and comparable earnings per common share from continuing operations
for 1992 excludes the after-tax effect of this charge.
(3) For comparative purposes, comparable earnings from continuing operations and comparable earnings per common share
from continuing operations for 1996 excludes the after-tax effect of the $121.4 million gain on sale of securities.
</TABLE>
53
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant is the parent corporation of CVS New York, Inc. ("CVS New
York"), a New York corporation. CVS New York is the direct parent corporation of
CVS Center, Inc., a New Hampshire corporation, and the indirect parent of CVS
Pharmacy, Inc., a Rhode Island corporation, and CVS H.C., Inc., a Minnesota
corporation.
CVS Pharmacy, Inc. is the direct parent of CVS H.C., Inc. which is the
parent corporation of Nashua Hollis CVS, Inc. ("Nashua Hollis"), a New Hampshire
corporation. Nashua Hollis is the parent corporation of approximately 1,145
subsidiaries, most of which operate CVS stores located in the United States,
selling prescription drugs, health and beauty care products.
Nashua Hollis is also the parent corporation of Bob's Stores
Center, Inc., which is the parent corporation of Bob's H.C., Inc. Bob's H.C.,
Inc. is the parent corporation of Amherst NY Bob's, Inc., which is the parent
corporation of 59 subsidiaries which were formed to operate specialty retail
stores located in the United States, selling casual clothing and footwear for
the entire family.
CVS Pharmacy, Inc. (formerly known as CVS, Inc.) is the parent
corporation of Melville Realty Company, Inc., a New York corporation, which is
the parent corporation of Melville Realty Management Corporation, MREFC, Inc.,
Danbury MRC, Inc., MRC Manchester Devco, Inc., Amherst MRC Devco, Inc., MRC
Woodlands Devco, Inc., MRC Henderson Devco, Inc., MRC Westbury Devco, Inc., MRC
Norwalk Devco, Inc., and MRC Staten Island Devco, Inc.
The Registrant is also an indirect parent corporation of Bob's, Inc., a
Connecticut corporation and CVS of DC & VA, Inc., a Maryland corporation, which
are included in the consolidated financial statements of the Registrant.
Several of the subsidiaries referred to in this Exhibit have not yet
opened their stores for business, and several no longer operate any stores. All
of the subsidiaries referred to herein are included in the consolidated
financial statements of the Registrant.
The names of other subsidiaries are omitted as, considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 423,900
<SECURITIES> 83,200
<RECEIVABLES> 145,100
<ALLOWANCES> 10,100
<INVENTORY> 1,031,400
<CURRENT-ASSETS> 1,972,700
<PP&E> 918,300
<DEPRECIATION> 311,800
<TOTAL-ASSETS> 2,831,800
<CURRENT-LIABILITIES> 1,181,900
<BONDS> 303,700
0
0
<COMMON> 1,100
<OTHER-SE> 1,244,000
<TOTAL-LIABILITY-AND-EQUITY> 2,831,800
<SALES> 5,528,100
<TOTAL-REVENUES> 5,528,100
<CGS> 3,978,100
<TOTAL-COSTS> 3,978,100
<OTHER-EXPENSES> 1,250,400
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 23,200
<INCOME-PRETAX> 403,400
<INCOME-TAX> 163,800
<INCOME-CONTINUING> 239,600
<DISCONTINUED> (164,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,400
<EPS-PRIMARY> .57
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 129,600
<SECURITIES> 175,000
<RECEIVABLES> 159,500
<ALLOWANCES> 33,400
<INVENTORY> 1,673,000
<CURRENT-ASSETS> 2,560,000
<PP&E> 1,707,900
<DEPRECIATION> 593,500
<TOTAL-ASSETS> 3,961,600
<CURRENT-LIABILITIES> 1,797,700
<BONDS> 327,700
1,300
0
<COMMON> 111,700
<OTHER-SE> 1,436,100
<TOTAL-LIABILITY-AND-EQUITY> 3,961,600
<SALES> 4,865,000
<TOTAL-REVENUES> 4,865,000
<CGS> 3,506,400
<TOTAL-COSTS> 3,506,400
<OTHER-EXPENSES> 1,350,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,500
<INCOME-PRETAX> (44,900)
<INCOME-TAX> (18,400)
<INCOME-CONTINUING> (26,500)
<DISCONTINUED> (630,600)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (657,100)
<EPS-PRIMARY> (6.41)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AND THE CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 80,100
<SECURITIES> 0
<RECEIVABLES> 278,500
<ALLOWANCES> 14,300
<INVENTORY> 2,584,200
<CURRENT-ASSETS> 3,098,900
<PP&E> 2,360,500
<DEPRECIATION> 809,100
<TOTAL-ASSETS> 5,207,100
<CURRENT-LIABILITIES> 2,368,700
<BONDS> 332,100
1,300
0
<COMMON> 111,600
<OTHER-SE> 2,089,400
<TOTAL-LIABILITY-AND-EQUITY> 5,207,100
<SALES> 3,501,000
<TOTAL-REVENUES> 3,501,000
<CGS> 2,505,500
<TOTAL-COSTS> 2,505,500
<OTHER-EXPENSES> 840,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,200
<INCOME-PRETAX> 117,800
<INCOME-TAX> 43,700
<INCOME-CONTINUING> 74,100
<DISCONTINUED> (75,100)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,000)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AND THE CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUL-01-1995
<CASH> 82,700
<SECURITIES> 0
<RECEIVABLES> 233,500
<ALLOWANCES> 13,900
<INVENTORY> 2,284,800
<CURRENT-ASSETS> 2,757,200
<PP&E> 2,255,300
<DEPRECIATION> 760,200
<TOTAL-ASSETS> 4,810,900
<CURRENT-LIABILITIES> 1,935,900
<BONDS> 331,200
1,300
0
<COMMON> 111,500
<OTHER-SE> 2,132,100
<TOTAL-LIABILITY-AND-EQUITY> 4,810,900
<SALES> 2,331,000
<TOTAL-REVENUES> 2,331,000
<CGS> 1,665,900
<TOTAL-COSTS> 1,665,900
<OTHER-EXPENSES> 540,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,600
<INCOME-PRETAX> 103,900
<INCOME-TAX> 42,600
<INCOME-CONTINUING> 61,300
<DISCONTINUED> (57,100)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,200
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AND THE CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> APR-01-1995
<CASH> 88,300
<SECURITIES> 0
<RECEIVABLES> 260,700
<ALLOWANCES> 15,900
<INVENTORY> 2,341,600
<CURRENT-ASSETS> 2,846,600
<PP&E> 2,203,000
<DEPRECIATION> 738,000
<TOTAL-ASSETS> 4,872,300
<CURRENT-LIABILITIES> 1,948,500
<BONDS> 331,300
1,300
0
<COMMON> 111,500
<OTHER-SE> 2,136,200
<TOTAL-LIABILITY-AND-EQUITY> 4,872,300
<SALES> 1,128,100
<TOTAL-REVENUES> 1,128,100
<CGS> 805,800
<TOTAL-COSTS> 805,800
<OTHER-EXPENSES> 266,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,100
<INCOME-PRETAX> 47,400
<INCOME-TAX> 19,400
<INCOME-CONTINUING> 28,000
<DISCONTINUED> (54,400)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,400)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> 0
</TABLE>
